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Cash Flow Operating Indirect

This guide outlines the steps to prepare the Operating Section of a Cash Flow Statement using the Indirect Method. It includes starting with Net Income, adjusting for non-cash expenses and non-operating gains, and making adjustments for current assets and liabilities. The final result is the Net Cash Flow from Operating Activities.

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9 views2 pages

Cash Flow Operating Indirect

This guide outlines the steps to prepare the Operating Section of a Cash Flow Statement using the Indirect Method. It includes starting with Net Income, adjusting for non-cash expenses and non-operating gains, and making adjustments for current assets and liabilities. The final result is the Net Cash Flow from Operating Activities.

Uploaded by

noor ahmed
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Cash Flow Statement – Operating Activities (Indirect Method)

This simple guide will help you prepare the Operating Section of a Cash Flow Statement
using the Indirect Method. Follow the steps in the same order every time.

Step 1: Start with Net Income


• Take Net Income (Profit after tax)
• Source: Income Statement

Step 2: Add Non-Cash Expenses (Income Statement)


These expenses reduce profit but do not use cash, so ADD them back:
• Depreciation
• Amortization
• Depletion
• Bad debts expense
• Loss on sale of asset

Rule: Expense + no cash payment = ADD

Step 3: Deduct Non-Operating Gains (Income Statement)


These gains increase profit but are not operating cash, so DEDUCT them:
• Gain on sale of asset
• Gain on sale of investment

Rule: All gains = DEDUCT

Step 4: Adjust Current Assets (Balance Sheet)


Examples:
• Accounts receivable
• Inventory
• Prepaid expenses

Rules:
• Increase in current asset = DEDUCT (cash not received)
• Decrease in current asset = ADD (cash received)

Step 5: Adjust Current Liabilities (Balance Sheet)


Examples:
• Accounts payable
• Outstanding expenses
• Unearned revenue

Rules:
• Increase in current liability = ADD (cash saved)
• Decrease in current liability = DEDUCT (cash paid)

Final Result
After all adjustments, you will get:
Net Cash Flow from Operating Activities

Quick Memory Rules


• Non-cash expenses → ADD
• Gains → DEDUCT
• Asset increase → DEDUCT
• Liability increase → ADD

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