what is the indirect method 
the indirect method is one of two accounting approaches used to create a cash flow statement it uses increases and decreases in balance sheet line items to modify the operating section of the cash flow statement from the accrual method to the cash method of accounting the indirect method for calculating cash flow from operating activities begins with net income and adjusts for accrual impacts during the reporting period common adjustments include depreciation and amortization 1the other option for completing a cash flow statement is the direct method which involves listing actual cash inflows and outflows during the reporting period the indirect method is more commonly employed particularly among larger firms due to its ease of use and direct connection to the balance sheet understanding the indirect methodthe cash flow statement primarily centers on a company s cash sources and uses it s closely monitored by investors creditors and other stakeholders it provides information on cash generated from various activities and depicts the effects of changes in asset and liability accounts on a company s cash position the indirect method starts with net income and then removes noncash items nonoperational gains and losses to calculate cash flow from operating activities adjustments are made for changes in connector accounts to convert accrual accounting figures to cash balances 2the indirect method is simpler to prepare than the direct method because most companies keep their records on an accrual basis example of the indirect methodrevenue is recognized when it s earned under the accrual method of accounting not necessarily when cash is received for example if a customer buys a 500 widget on credit the revenue is recognized in the month of the sale even though the cash hasn t yet been received the indirect method of the cash flow statement adjusts net income to reflect actual cash inflows and outflows during the period at the time of the sale a debit is made to accounts receivable and a credit to sales revenue for 500 this increases accounts receivable which is then displayed on the balance sheet even though no cash has been received in this example 500 in revenue is recognized overstating net income on a cash basis by this amount the offset sits in the accounts receivable line item on the balance sheet to adjust the cash flow statement reduces net income by the 500 increase in accounts receivable displayed as increase in accounts receivable 500 in the cash flow statement using the indirect method net income is presented on the first line subsequent lines show increases and decreases in asset and liability accounts which are added to or subtracted from net income based on their cash impact 3indirect method vs direct methodthe cash flow statement is divided into three categories cash flows from operating activities cash flows from investing activities and cash flows from financing activities the total cash generated from operating activities is the same under both the direct and indirect methods though the information is presented differently under the direct method cash flow from operating activities is shown as actual cash inflows and outflows without starting from net income on an accrued basis the investing and financing sections are prepared similarly for indirect and direct methods many accountants prefer the indirect method because it s simpler to prepare the cash flow statement using information from the income statement and the balance sheet most companies use the accrual method of accounting so the figures on the income statement and balance sheet will be consistent with this method 