Operating Activities — Indirect Method

Concept

Starting with Net Income

The indirect method starts with net income and adjusts for non-cash items and changes in working capital. Add back non-cash expenses (depreciation, amortization), adjust for gains/losses on sales of assets, then adjust for changes in current assets and current liabilities.

Example

Common Adjustments

Start: Net Income $50,000 Add: Depreciation $8,000 Add: Loss on sale of equipment $2,000 Subtract: Increase in A/R ($5,000) Add: Increase in A/P $3,000 Subtract: Decrease in Accrued Liabilities ($1,000) = Cash from Operations $57,000

Key Point

Working Capital Rules

Increase in current ASSET = SUBTRACT (cash was used) Decrease in current ASSET = ADD (cash was freed) Increase in current LIABILITY = ADD (cash was saved) Decrease in current LIABILITY = SUBTRACT (cash was paid)

Purpose & Structure of the Statement

Operating Activities — Direct Method

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