Indirect Method Cash Flow

What indirect method cash flow covers

The indirect method starts from profit and works back to operating cash flow by removing non-cash items and the effects of accruals. Depreciation, amortisation, impairments and gains or losses on disposal are added back or deducted, then movements in working capital are applied. The total operating cash flow is identical to the direct method — only the presentation differs.

Challenges here give you profit, the movements in working capital and the non-cash adjustments, and ask for the reconciliation.

Where marks are usually lost

• Adding a gain on disposal instead of deducting it — the whole proceeds belong in investing activities.
• Getting the direction of a working capital movement backwards; a rise in inventory consumes cash.
• Leaving depreciation out of the add-backs.