Operating activities

In this lesson

1. 0:00 Operating activities overview
2. 1:13 Direct vs indirect methods explained
3. 2:19 Direct method using control accounts
4. 6:04 Direct method worked example
5. 6:19 Indirect method adjustments explained
6. 8:49 Indirect method worked example
7. 11:08 Tax and interest paid calculations

About this lesson

Operating activities cover the principal revenue-generating activities of a business, including cash received from customers, cash paid to suppliers and employees, plus tax and interest payments. You'll discover why this section matters: it reveals the actual cash your business generates from day-to-day operations, separate from investing and financing decisions. You'll explore two methods for calculating operating cash flow. The direct method extracts cash receipts and payments directly from accounting records using control accounts—this is IAS 7's preferred approach but rarely appears in exams. The indirect method, which you're far more likely to encounter, starts with profit before tax and adjusts for non-cash items like depreciation and amortisation, then accounts for working capital movements in inventory, receivables, and payables. Both methods arrive at the same figure; they're simply different routes to the answer. The lesson walks you through worked examples using both approaches. For the direct method, you'll learn to build control accounts for receivables, payables, and wages to find the cash balances. For the indirect method—the practical focus—you'll adjust profit systematically, adding back expenses that didn't involve cash outflows and then adjusting for changes in working capital that do affect cash. You'll also see how to use T accounts to calculate specific cash payments like tax paid or interest paid when the statement of profit or loss and statement of financial position don't show them directly.

Duration: 13m