= Net income + Non-cash items + Changes in working capital Net cash flow from operating activities (Indirect Method): Decrease in income tax payable: -$3,000.Increase in accounts receivable: -$10,000.Adjustments for changes in working capital:.Net cash flow from operating activities (Direct Method): $80,000Ĭash Flow Statement – Operating Activities (Indirect Method): Increase in accounts receivable: $10,000Ĭash Flow Statement – Operating Activities (Direct Method):.The following financial data is available for TechCo: Let’s consider a hypothetical example of a company called TechCo and create a simple cash flow statement for its operating activities during the year using both the direct and indirect methods. Example of Cash Flow Statement Direct vs Indirect Method Although the direct method is preferred by standard-setting bodies, the indirect method is more commonly used in practice due to its simplicity and reliance on readily available financial data. The direct method provides a more detailed view of actual cash transactions, while the indirect method focuses on reconciling net income with cash flow from operations. May be considered less transparent because it does not directly present the actual cash inflows and outflows, but rather focuses on adjustments to net income.īoth direct and indirect methods ultimately provide the same information about a company’s cash flows, but they approach the presentation differently.Is more commonly used because it is simpler to prepare and relies on data readily available from the income statement and balance sheet.Provides a reconciliation between the company’s net income and its cash flow from operations, offering insights into the relationship between accrual-based profitability and actual cash generation.Starts with the net income ( accrual basis) and adjusts it for non-cash items, such as depreciation and amortization, and changes in working capital (i.e., changes in current assets and current liabilities).Preferred by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) because of its transparency.Is less commonly used because it requires more detailed information, which may not be readily available or may be time-consuming to collect and analyze.Offers more transparency into the actual sources and uses of cash during a period, making it easier to understand the cash movement.Presents cash inflows and outflows from operating activities in detail, showing cash receipts and payments from various sources such as customers, suppliers, employees, and interest payments.Each method presents the same information but in a different manner, with different levels of detail. There are two primary methods for preparing the statement of cash flows: the direct method and the indirect method. The statement of cash flows is one of the main financial statements that companies prepare, and it shows the cash inflows and outflows during a specific period. Cash Flow Statement Direct vs Indirect Method
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