Starting Profit (CF Statement)

The cash flow statement's indirect method starts from a profit figure and adjusts it to arrive at the cash actually generated. Which profit figure it starts from is the company's own presentation choice, and the two conventions are both standard:

Start from net income: typical of US filers. This line then equals the Net Income on the income statement.
Start from profit before tax: common under IAS 7 among IFRS filers, which then show income taxes paid as a separate line further down.

So a difference between this line and the income statement's Net Income is usually the tax charge, not an error. Compare it against both Net Income and Pre-Tax Income to see which convention a company uses.

The indirect method starts from a profit figure because:

Accrual accounting: reported profit includes non-cash items that must be adjusted
Reconciliation: it shows how profit converts to operating cash flow
Transparency: it makes the difference between earnings and cash visible

Common adjustments:

Add back: Depreciation, amortisation, stock-based compensation
Subtract: Gains on asset sales, increases in receivables
Add: Losses, increases in payables, decreases in inventory

Why it matters:

Quality of earnings: large adjustments may indicate aggressive accounting
Cash conversion: companies with high reported profit but low cash flow may have earnings quality issues
Sustainable profits: cash-backed earnings are more reliable than paper profits

Compare this line to operating cash flow over multiple periods. Persistent gaps between profit and cash generation warrant investigation.

How it relates

Starting Profit (CF Statement)+Depreciation & AmortizationDepreciation and amortization are non-cash expenses that spread the cost of assets over time. They reduce reported profit but do not use cash in the current period, so they are added back when calculating cash flow.+Stock-based CompensationStock-based compensation is the value of shares or options given to employees as part of their pay. It counts as an expense in profit, but it does not use cash directly in the period so it is added back in the cash flow.+Deferred Taxes (CF)Deferred taxes in the cash flow statement reflect timing differences between when tax is recorded in the accounts and when it is paid in cash. Positive amounts typically add back to cash, while negative amounts reduce cash.+Other Non-cash ItemsOther non-cash items capture adjustments that affect reported profit but not current cash, such as write-downs or unrealised gains and losses. These are added back or subtracted to get closer to real cash flow.=Operating Cash FlowOperating cash flow is the cash the business generates from its normal day-to-day operations before investing and financing. It shows how much cash is coming in from customers after paying suppliers and operating costs.