Debtors, stock and prepaid expenses are operating assets used in the profit making process. Creditors and accrued expenses payable are operating liabilities used in the profit making process.

  • Operating asset increases and operating liability decreases are negative adjustments (decrease cash flow from operating activities)

  • Operating asset decreases and operating liability increases are positive adjustments (increase cash flow from operating activities)

  • Depreciation and amortisation expenses are positive adjustments (increase cash flow from operating activities)

Cardinal Rule: Make all cash flow adjustments to net income; don’t simply add back depreciation and amortisation, which could be seriously misleading to your auditors.