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
  CFA Level I · Financial Statement Analysis

  “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
  CFA Level I · Financial Statement Analysis

  “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

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with I · Glossary