 operating is typically the largest cash flow item notice if you were to think about it intuitively you would probably say okay if i'm going to make a statement of cash flows and the reason for this is because the income statement is on and accrual basis so that i have this nice comparison on the income statement then i'm just going to take each line item on the income statement and record it on a cashed based system and that will convert it to a cashed based system that would be the the simplest thing to think about or the easiest way to visualize what you would do in other words instead of recording revenue when for example i enter an invoice because i didn't get cash on an invoice i wait until i receive the payment and instead of entering an expense when i enter a bill i wait until the bill is paid and then i just run my income statement on that basis kind of eliminating the cash items now you could do that and that would be an operating activity in essence statement but it would be under a direct method and most statement of cash flows are actually going to use what's called the indirect method even though the direct method is more intuitive in that we're going to start with the in balance net income so net income if i go back on over here and i say this goes from 0 1 0 1 2 2 and run it net income down below is the 1 6 4 2 46 so there is that and then we're going to have all of our adjustments reversing out the accrual components to get to in essence the net income on a cash flow basis or net cash is prop net cash provided by operating activities so so this kind of confuses people when they first look at it because like i say we're we're backing into it instead of starting from the top down going from income minus expenses on a direct method why would we do that because it's kind of possible you would think quick books could kind of put together the operating section on a direct method however most of the time for reporting purposes for like generally accepted accounting principles they actually like the indirect method better because it gives you a reconciliation so if i was just to to recreate the income statement top down i don't get this nice reconciliation of net income that ties out there's the differences that get me to the cash flow provided by operating activities therefore many times regulations that allow the direct method also still want the indirect method and therefore the default is just to use the indirect method where you have this nice reconciliation now the funny thing about the indirect method is that you kind of back into this area because notice that what we're getting to here here too is net income in essence on a cash flow statement on a cash flow basis so you would think that you would just be looking at the income statement to do that but what we're ending up doing to back into that is we're going to the balance sheet and we're looking at the difference between the prior period and the current period so i can take another difference one here and say let's make this compared to the previous period and dollar change right we're looking at we're looking at the difference because if this is where i stand let's look at the accounts receivable for example if this is where i stand as of right now and i subtract it out of what happened in the prior period which was zero in this case this is this is the change between those two and because this is an accrual account it doesn't have cash related to it i can kind of back into what what what was the non-cash transaction impact on the income statement because the other side of accounts receivable when we record an invoice is revenue so we're going to kind of back into the reversal of the non-cash items by looking at the differences in all of the balance sheet accounts and that that becomes quite complex to actually think about so we actually have a course on building the statement of cash flows and if you can construct a statement of cash flows then that actually gives you a much better understanding of the accrual concepts in general so highly recommend doing that it's a good practice notice that all of these accounts the other side of them have an impact on the income statement so accounts receivable invoice form typically impacts it the other side of it is revenue inventory typically when you sell inventory the other side is caused to get sold on the income statement accounts payable typically the other side of accounts payable balance sheet account is an income statement account of an expense at least you know mastercard is going to be a credit card we usually buy in an expense amazon revenue pay this is another payable so other side often expense board of equalization other sides and expense and notice they have the loan payable up here which is kind of interesting because you would think that possibly the loan payable would be under the financing activities right because a loan would typically be a financing type of activity so also just realized that although quickbooks gets to something that is in balance here ties out to the to the to the balance sheet it may not always be perfect because if you have complex transactions such as you're purchasing something like property planting equipment on account you're financing it then quickbooks may not be able to categorize properly what's going on and and so it gives you a pretty good statement of cash flows but it might not be perfect and you might have to if you were to do external reporting do some adjustments to it but in any case then you've got the so