Indirect vs. Direct Method of Presenting Cash Flows from Operating Activities

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  • #175653
    Anonymous
    Inactive

    The reconciliation of net income to operating cash flows is killing me!!!!!! I know that under the indirect method, net income is adjusted to derive net cash flow from operating activities by:

    1) Adding back non-cash charges (reductions) included in deriving net income; and

    2) Subtracting out non-cash credits (increases) included in deriving net income…

    BUT…the whole process confuses the crap out of me, and I keep getting problems wrong! Have others had trouble with this, and how can I best study the indirect method of presenting CFs from operating activities?

    Thanks!!!!

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  • #392474
    TheCPAman
    Member

    I think indirect method is easier than direct method.

    This is how I know it:

    +N.I

    +Depreciation

    +Losses

    + Discount on Bonds

    -Gains

    -Premium on Bonds

    -Increase in A/R

    +Decrease in A/R

    -Increase in Inventory

    +Decrease in Inventory

    +Increase in A/P

    -Decrease in A/P

    +Increase in Accrued Liabilities

    -Decrease in Accrued Liabilities

    +Increase in Deferred Taxes

    To make the above list shorter:

    Add if Assets decreases (A/R, inventory, etc) (inverse relationship)

    Subtract if Assets increases (A/R, inventory, etc)

    Add if Liabilities Increases (A/P, deferred taxes, accrued Liabilities etc) (direct relationship)

    Subtract if Liabilities Decreases (A/P, deferred taxes, accrued Liabilities etc)

    Investing and financing are same under both method.

    #392475
    musicamor
    Member

    The difference betwen the indirect and direct methods of preparing the SOCF, is the indirect method utilizes the change in balance sheet accounts, i.e., an increase or decrease in A/R; whereas the direct method utilizes transaction-related information, i.e., cash receipts and billings for A/R. For indirect preparation, all you're doing is reorganizing the net income number in order to come back to cash.

    Texas CPA - licensed in 2012!!!

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