ASC 230 cash flows explained

The US cash flow statement looks like its IFRS equivalent but follows different classification rules, and ASC 230 adds specific guidance for items such as debt prepayment costs and contingent consideration. This guide explains the US GAAP rules and builds operating cash flow from net income.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

ASC 230 sets out the US GAAP statement of cash flows. Cash receipts and payments are classified as operating, investing or financing activities, and the statement explains the change in cash, cash equivalents and restricted cash. Under US GAAP, interest paid, interest received and dividends received are operating cash flows, and dividends paid are financing. Companies may use the direct or indirect method; if they use the direct method, they must also reconcile net income to operating cash flow.

At a glance

Activities
Operating, investing, financing
Interest paid and received
Operating
Dividends received
Operating
Dividends paid
Financing
Restricted cash
Included with cash
Direct method
Needs an indirect reconciliation
ASC 230 cash flows explainedActivities: Operating, investing, financing; Interest paid and received: Operating; Dividends received: Operating; Dividends paid: Financing; Restricted cash: Included with cash; Direct method: Needs an indirect reconciliation.KEY FACTS AT A GLANCEASC 230 cash flows explainedActivitiesOperating, investing,financingInterest paid and receivedOperatingDividends receivedOperatingDividends paidFinancingRestricted cashIncluded with cashDirect methodNeeds an indirectreconciliationTax BakersASC 230 cash flows explainedActivities: Operating, investing, financing; Interest paid and received: Operating; Dividends received: Operating; Dividends paid: Financing; Restricted cash: Included with cash; Direct method: Needs an indirect reconciliation.KEY FACTS AT A GLANCEASC 230 cash flows explainedActivitiesOperating, investing, financingInterest paid and receivedOperatingDividends receivedOperatingDividends paidFinancingRestricted cashIncluded with cashDirect methodNeeds an indirect reconciliationTax Bakers
Key facts at a glance, as set out in this guide.

How is operating cash flow built under ASC 230?

From net income to operating cash flow ($ million)From net income to operating cash flow ($ million)500Net income+300Depreciationand amort.+40Deferredtaxes-20Gain onsale-70Workingcapital750Operatingcash flow
US GAAP starts the indirect method from net income.

A company has net income of $500 million. It adds back depreciation and amortization of $300 million and deferred income taxes of $40 million, deducts a $20 million gain on selling equipment, whose proceeds are investing cash flows, and deducts $70 million for the increase in working capital. Net cash from operating activities is $750 million. Under US GAAP, the starting point is net income, and interest paid stays within operating activities.

Investing activities then show capital expenditure, acquisitions net of cash acquired and proceeds from disposals; financing activities show borrowings, repayments, share issues and buybacks, and dividends paid. The three totals, plus the effect of exchange rate changes, explain the change in cash, cash equivalents and restricted cash for the year.

How does ASC 230 classify common cash flows?

Cash flowClassification under ASC 230
Interest paid, interest received, dividends receivedOperating
Dividends paidFinancing
Income taxesOperating
Debt prepayment and extinguishment costsFinancing
Contingent consideration paid soon after an acquisitionInvesting; later payments financing up to the acquisition date liability, any excess operating
Proceeds from insurance claimsBased on the nature of the loss
Operating lease payments; finance lease principalOperating; financing

What is included in cash?

Cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The statement reconciles the total of all three, and companies disclose the nature of the restrictions and reconcile the total to the balance sheet lines. Cash equivalents are short-term, highly liquid investments with original maturities of three months or less. Bank overdrafts are not netted against cash; changes in book overdrafts are generally financing activities, unlike IFRS, where overdrafts can form part of cash.

What if the direct method is used?

The FASB encourages the direct method, showing major classes of gross receipts and payments. A company that uses it must also present a reconciliation of net income to net cash from operating activities, which is why most US companies simply use the indirect method.

How is free cash flow calculated from a US cash flow statement?

Free cash flow is not defined by US GAAP. It is usually net cash from operating activities less capital expenditures. Because interest paid is an operating cash flow under ASC 230, US free cash flow is after interest, while an IFRS company's operating cash flow, and so its free cash flow, may be before interest. Public companies presenting free cash flow follow the SEC's rules on non-GAAP measures.

What are common ASC 230 mistakes?

Including the change in payables for capital expenditures in operating cash flow instead of adjusting the investing outflow; showing acquisitions of businesses gross rather than net of cash acquired; presenting noncash finance lease additions as investing outflows; and netting borrowings and repayments of debt with maturities over three months, which must be shown gross.

What about noncash transactions?

Investing and financing activities that do not involve cash, such as acquiring assets through finance leases or converting debt to equity, are disclosed separately. Companies also disclose interest paid, net of amounts capitalized, and income taxes paid, which ASU 2023-09 now requires to be broken down by jurisdiction.

How does ASC 230 differ from IAS 7?

Under IFRS, from 2027, most companies classify interest paid as financing and interest and dividends received as investing, and start the indirect method from operating profit. See IAS 7 vs ASC 230 and the indirect method step by step. The Cash flow statement template (Excel) follows the IFRS 18 layout but can be adapted by moving interest and dividends to operating.

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Questions people ask

What is ASC 230?

The US GAAP topic on the statement of cash flows, classifying cash flows into operating, investing and financing activities.

Where is interest paid classified under US GAAP?

In operating activities, as are interest received and dividends received; dividends paid are financing.

Is restricted cash included in the US GAAP cash flow statement?

Yes. The statement explains the change in cash, cash equivalents and restricted cash together.

Is a reconciliation required under the direct method?

Yes. US GAAP requires a reconciliation of net income to operating cash flow when the direct method is used.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. FASB Accounting Standards Codification: Topic 230, Statement of Cash Flows
  2. Financial Accounting Standards Board

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

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This guide is general information. It is not tax or legal advice for your situation.