Why the Cash Flow Statement Matters for Leases
Each lease payment lands in one of three sections of the statement of cash flows, depending on the lease type and what the payment buys. ASC 842 puts almost all leases on the balance sheet, and the cash flow statement is where a reader checks what those leases cost in cash. The sections below give the rule for each payment, then one worked example.
The Essence of the Statement of Cash Flows
The statement of cash flows bridges the income statement and the balance sheet. It reports an entity's cash inflows and outflows over a period. Investors and creditors use it to judge liquidity, solvency and financial flexibility. Splitting cash into operating, investing and financing activities shows how the entity generates cash and how it uses it.
Classifying Transactions under ASC 842
Under ASC 842, lease transactions can impact all three sections of the statement of cash flows: operating, investing, and financing.
Operating Activities
Operating activities generally include the principal cash effects of transactions and other events that enter into the determination of net income. Under ASC 842, payments on operating leases are classified within operating activities (ASC 842-20-45-5(c)). So are short-term lease payments and variable lease payments not included in the lease liability (ASC 842-20-45-5(d)).
The single lease cost an operating lease produces is an income statement presentation. It does not change where the cash payment lands.
Investing Activities
Investing activities generally include transactions involving the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Under ASC 842, operating lease payments go to investing activities in only one case. That is the part representing costs to bring another asset to the condition and location necessary for its intended use (ASC 842-20-45-5(c)).
Financing Activities
Financing activities include transactions and events that affect long-term liabilities and equity. Under ASC 842, repayments of the principal portion of a finance lease liability are classified within financing activities, similar to the repayment of principal on traditional debt (ASC 842-20-45-5(a)). Interest on the finance lease liability follows the interest-paid requirements of Topic 230, which typically means operating activities (ASC 842-20-45-5(b)).
Significant Differences Between ASC 840 and ASC 842
The biggest change is that operating leases now sit on the balance sheet, yet their payments still land in operating activities. The lease footnote carries the rest, as our ASC 842 disclosure footnote page explains.
Where Each Lease Payment Lands on the Statement of Cash Flows
A lessee sorts each lease cash payment by lease type and by what the payment buys. ASC 842-20-45-5 sets four rules, and the table below applies them. The starting point is the classification you reached under ASC 842 lease classification.
| Cash payment | Statement of cash flows line | Paragraph |
|---|---|---|
| Finance lease: principal portion of the lease liability | Financing activities | 842-20-45-5(a) |
| Finance lease: interest on the lease liability | Per Topic 230 interest paid, which is typically operating activities | 842-20-45-5(b) |
| Operating lease: lease payments | Operating activities | 842-20-45-5(c) |
| Operating lease: costs to bring another asset to the condition and location necessary for its intended use | Investing activities | 842-20-45-5(c) |
| Variable lease payments and short-term lease payments not included in the lease liability (either lease type) | Operating activities | 842-20-45-5(d) |
The table follows the Codification text as reproduced in Deloitte's DART leasing roadmap, section 14.2. The KPMG Handbook: Leases (section 6.9.3) adds that interest on a finance lease is typically an operating item.
Finance Lease Cash Flow: Principal and Interest
A finance lease payment splits in two on the statement of cash flows. The principal reduces the lease liability and is a financing outflow. The interest is presented under the Topic 230 interest-paid rules, so most entities show it in operating activities (ASC 842-20-45-5(a) and (b)).
The old label "capital lease" is ASC 840 vocabulary. ASC 842's closest counterpart is the finance lease, though the two often differ (KPMG Handbook: Leases, 6.4.130). The amortization of the right-of-use asset is not a cash item at all, so it never appears as a payment line.
The split comes straight from the amortization schedule. Each period, interest is the opening liability times the discount rate, and principal is the payment less that interest. Our ASC 842 journal entries page shows the entries behind those two amounts.
Operating Lease Cash Flow: One Payment, One Section
An operating lease payment is a single operating outflow. It is not split into interest and principal on the statement of cash flows, even though the lease liability is still measured at present value (ASC 842-20-45-5(c)).
The exception is narrow. To the extent a payment represents costs to bring another asset to the condition and location necessary for its intended use, the Codification places it in investing activities instead.
Payments that never entered the lease liability stay in operating activities. That covers variable payments and payments on leases you elected not to recognize under the short-term lease exemption (ASC 842-20-45-5(d)). See variable lease payments and short-term leases for how those amounts arise.
Right-of-Use Assets and the Cash Flow Statement
A right-of-use asset is not a cash flow. Recognizing the asset and the lease liability at commencement is a noncash transaction, so neither amount appears in the body of the statement (ASC 842-20-50-4(g)(2)). It is separately disclosed with other noncash activity.
What does appear is the reconciliation. If you use the indirect method, income already includes the lease cost, so the operating section needs adjustments that turn it back into cash.
EY's lease guide (May 2026) states its view on the indirect method. Changes in the operating lease liability and the right-of-use asset should be presented separately as adjustments to net income in operating activities. EY says to label the asset change as something like "noncash lease expense", and not as amortization expense (EY Financial reporting developments: Lease accounting, section 4.9).
Deloitte's roadmap calls the add-back a best practice and notes that other presentation methods may be acceptable. It says presenting the change in right-of-use assets as amortization expense would be inappropriate (Deloitte DART leasing roadmap, section 14.2).
These are firm interpretations, not Codification text. The Codification fixes where the cash lands. The labels for the reconciling items are practice.
Worked Example: Where One Lease Lands on the Cash Flow Statement
Assume a lessee signs a three-year equipment lease with $10,000 payable at the end of each year. The incremental borrowing rate is 6%. This is the same lease as the income statement example.
The liability is the present value of the three payments not yet made, $26,730 (ASC 842-20-30-1). No cash changes hands at commencement. The figures are ours, computed from those inputs, and we show the same payments under both classifications.
Lease liability roll-forward
| Year | Opening liability | Interest at 6% | Cash payment | Principal | Closing liability |
|---|---|---|---|---|---|
| 1 | $26,730 | $1,604 | $10,000 | $8,396 | $18,334 |
| 2 | $18,334 | $1,100 | $10,000 | $8,900 | $9,434 |
| 3 | $9,434 | $566 | $10,000 | $9,434 | $0 |
Principal across the three years is $26,730, which equals the opening liability. Amounts are rounded to whole dollars. Year 3 interest is set so the liability ends at zero.
Year 1 statement of cash flows, lease lines only
Amounts in parentheses are cash outflows.
| Line | Finance lease | Operating lease |
|---|---|---|
| Operating activities: interest paid | ($1,604) | – |
| Operating activities: lease payment | – | ($10,000) |
| Financing activities: principal repaid | ($8,396) | – |
| Total cash paid | ($10,000) | ($10,000) |
| Not in total (noncash, disclosed separately): lease liability arising from obtaining the ROU asset | $26,730 | $26,730 |
Total cash is the same in both columns, because the contract is the same. Only the section changes. The finance lease moves $8,396 into financing, so operating cash flow looks $8,396 better than under the operating lease. Financing cash flow looks worse by the same amount.
For the operating lease in an indirect-method statement, assume the single lease cost is the straight-line $10,000. Year 1 interest accretion is $1,604, so the right-of-use asset reduction (noncash lease expense) is $8,396. That equals the decrease in the lease liability, and the two adjustments net to zero against each other. Operating cash flow ends at the $10,000 payment.
This is an illustration with simplified inputs. It has no initial direct costs, incentives or prepaid rent, any of which would change the asset balance. Entity-specific facts decide the actual presentation.
Supplemental Cash Flow Disclosures
Separate from the statement itself, the lease footnote carries two cash flow items. One is cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows. The other is supplemental noncash information on lease liabilities arising from obtaining right-of-use assets (ASC 842-20-50-4(g), as quoted by PwC Viewpoint, Financial statement presentation guide, section 14.2).
In the example, the first disclosure is $1,604 of operating cash and $8,396 of financing cash for the finance lease. The operating lease shows $10,000 of operating cash. The second disclosure is the $26,730 for each lease. Our ASC 842 disclosure footnote page covers the rest of the footnote.
Related Financial Statement Presentation
The cash flow statement is one of three places a lease shows up. The balance sheet presentation covers the right-of-use asset and lease liability lines, and the income statement presentation covers lease cost and finance lease interest and amortization. The $1,604 of finance lease interest in the year 1 cash flow statement is the same interest expense shown in the income statement example.
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