Cash Flow Statement: Indirect Method

Explanation of The Cash Flow Statement (Indirect Method)

One of the financial analysis that is vital for financial manager, in addition to other financial instruments are cash flow statement. The definition of this analysis is to find out how it will be use. How the needs of the funds will be spent. The cash flow analysis can be known from whom obtain and for what these funds are use. A report that describes where obtain and for what the Treasury use, as refers to as cash flow statement.

Cash flow statement directly or indirectly reflect the entity's cash receipts are classify according to the primary sources. Even and payments of cash classify according to main user for one period. This report provides useful information on the activities of the entities in generating cash on his activities and on investing or sending cash.

Overview to Indirect Method of Cash flow

In the Indirect Method, the influence of the postponement of all receipts and expenditures cash in the past and all of the cash receipts. Cash spending expect in the days to come were remove and the net profit accounted for income. This provision is complete by adding the posts which do not require cash expenditures back to net income. As well as the addition and subtraction of the increase or decrease debt and accounts receivable.

The main advantage of this method is that it is concentrated the difference between net income and net cash flow from operating activities.

Net cash flow from operating activities is determine by adjusting the profit or loss net of influence:

1. Changes in inventories and accounts receivable and Payable business during the period.


2. The post instead of cash, such as depreciation, allowance, deferred tax, foreign exchange gains and losses are unrealized profits of associate companies. That have yet to be share and minority interest in loss consolidation/comparison.


3. Net cash flow from operating activities can be reports (indirect) by presenting income with load express in the income statement. As well as the change in inventories, receivables and Payable business during a certain period. While the manner of reporting cash flows from investing and funding on two methods. Either directly or indirectly is the same. So different are the methods of reporting cash flow for operating activities of the company.

Financial institutions have a strong desire towards indirect method due to their suppose method is more informative.

Financial Institutions

Although financial institutions that wants the debtor compile cash flow statement. The company with direct method but the debtor can't be grant meet the wishes of creditors. Because for him the more useful the use of indirect methods It is able to describe the net cash flow from operating activities. Also this approach can better attract attention with a complex adjustment.

Indirect methods also provide financial information in the determination of profit/loss that uses the accrual basis method. Where this method is the wrong directions in assessing the cash flow from operations.

If the company continue to use the indirect method, then there should be a separate disclosures regarding changes in estimate accounts receivable, inventory, investments, fees are paid upfront and estimates of other current assets.

Estimated Payable, payroll, rent and estimated debt to smoothly determine the amount of net cash from operating activities change in time was about to adjust net income with revenue and expenditure net of operating activities.

Cash flow statement format methods of indirect trading companies or service companies must begin with net profit. Namely entering the net influence from around the profit and loss report estimates. Then report the adjustments necessary to change the whole profit and loss report estimates into cash flow figures.

Keep in mind that only adjustments are report. As is the case with the direct method, the best way to display the cash flow statement the indirect method is to look at the report profit and loss an estimate for the sake of his estimate.

How to Calculate The Cash Flow Report Indirect Method

The sale

What adjustments are need to change the numbers in these estimates into cash-flow numbers?.  An increase of $20 in the accounts receivable business means that the cash collected is less than the number of sales $20 $150. Thus, the necessary adjustments to convert net income into cash flow is by subtracting the increase in accounts receivable $20 effort.

Cost of goods sold.

Decrease of $25 in stock means that although the cost of goods selling amount to $80 has been include in the report of the profit and loss. But the cash was used to buy inventory figures less than the cost of goods sold. Thus, the number $25 the decline in supplies need to be added to change the net profits into cash flow.

The burden of salary.

profit and loss report contains a reduction of $25 to load salary. But an increase of $3 in the salary debt shows that not all of the $25 the burden of salary has been paid for with cash. Therefore, an increase in salary of debt $3 added to net income.

Burden of shrinkage.

Depreciation of $30 load is a load of non-cash. Because in the report profit and loss the number reduce to get net profit. Then in the cash flow statement the figure must be add back to net income.