Indirect method
Presenting operating cash flow by starting from net income and adjusting for non-cash items and changes in working capital. Nearly every company uses it, and it explains why profit and cash differ.
Where you will meet it
Indirect method appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Tell apart cash flows from operating, investing and financing activities
“The indirect method starts from net income and reverses out non-cash charges and working capital movements, which is why depreciation is added back without any cash having moved.”
- Contrast the direct and indirect presentation of operating cash flow
“The indirect method starts from net income and reconciles to operating cash flow by adding back non-cash charges and adjusting for changes in working capital, which shows why the two differ.”
See also
Operating cash flow · Working capital
Practise it
Practise indirect method until it is automatic: questions that explain every wrong option.
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