Explanation

To calculate cash flow from operating activities using the indirect method, we start with net income and make adjustments for non-cash items and changes in working capital.

Starting with net income: €300 million

Add back non-cash expenses:

• Depreciation expense: +€35 million

Adjust for changes in working capital:

1. Increase in inventory (€20 million): This represents cash outflow (purchasing inventory), so we subtract €20 million
2. Decrease in accounts receivable (€30 million): This means customers paid their bills, resulting in cash inflow, so we add €30 million
3. Increase in accounts payable (€25 million): This means the company delayed payments to suppliers, resulting in cash conservation, so we add €25 million

Calculation:

Net income: 300
+ Depreciation: 35
- Increase in inventory: 20
+ Decrease in accounts receivable: 30
+ Increase in accounts payable: 25
= 300 + 35 - 20 + 30 + 25 = 370

Net income: 300
+ Depreciation: 35
- Increase in inventory: 20
+ Decrease in accounts receivable: 30
+ Increase in accounts payable: 25
= 300 + 35 - 20 + 30 + 25 = 370

Therefore, cash flow from operating activities = €370 million

Key points to remember:

• Depreciation: Non-cash expense, always added back
• Inventory increase: Cash outflow (subtract)
• Accounts receivable decrease: Cash inflow (add)
• Accounts payable increase: Cash inflow (add)

The opposite adjustments would apply for:

• Inventory decrease (add)
• Accounts receivable increase (subtract)
• Accounts payable decrease (subtract)