Indirect Method

The indirect method is a way of calculating cash flow from operating activities. It starts with net income and then makes adjustments to remove non-cash items and add back non-operating items. The indirect method is the more common method of calculating cash flow from operating activities.

The direct method is another way of calculating cash flow from operating activities. It starts with cash receipts and cash payments from operating activities. The direct method is less common than the indirect method.

The indirect method is more complex than the direct method, but it is also more accurate. The indirect method takes into account all of the non-cash items that affect net income, while the direct method only takes into account cash receipts and cash payments.

The indirect method is the preferred method for calculating cash flow from operating activities because it is more accurate. However, the direct method is sometimes used because it is easier to understand.

Here is an example of how the indirect method works.

A company has net income of $100,000. The company also has depreciation expense of $20,000 and an increase in accounts receivable of $10,000. To calculate cash flow from operating activities using the indirect method, we would start with net income of $100,000. We would then add back depreciation expense of $20,000 and subtract the increase in accounts receivable of $10,000. This would give us cash flow from operating activities of $110,000.

The direct method is a simpler way of calculating cash flow from operating activities. It starts with cash receipts and cash payments from operating activities. To calculate cash flow from operating activities using the direct method, we would add together all of the cash receipts from operating activities and subtract all of the cash payments from operating activities.

Here is an example of how the direct method works.

A company has cash receipts of $100,000 from sales and cash payments of $80,000 for expenses. To calculate cash flow from operating activities using the direct method, we would add together cash receipts of $100,000 and subtract cash payments of $80,000. This would give us cash flow from operating activities of $20,000.

The direct method is less accurate than the indirect method because it does not take into account all of the non-cash items that affect net income. However, the direct method is easier to understand and it is often used for internal reporting purposes.