What is Indirect method (statement of cash flows)?
In short
The indirect method presents operating cash flow by starting with net income and adjusting it for noncash items, gains and losses on investing and financing activities, and changes in operating working capital.
Key takeaways
- Depreciation and amortization are added back; gains on sales of assets are subtracted.
- An increase in a current operating asset (such as receivables) reduces operating cash; an increase in a current operating liability adds to it.
- The direct method shows major classes of receipts and payments instead, and companies using it must also provide the indirect reconciliation.
Example
Net income $150,000, depreciation $40,000, a $10,000 gain on sale and a $25,000 rise in receivables give $155,000 before other working capital changes.
Where it's tested
FAR: Statement of Cash Flows — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under US GAAP, dividends PAID by a corporation are classified in the statement of cash flows as: