How To Use the Indirect Method To Prepare a Cash Flow Statement

It’s also compliant with both generally accepted accounting principles (GAAP) and international accounting standards (IAS). Since you only need to use information from the financial statements that were already indirect cash flow vs direct prepared, this is a much more practical and efficient use of your team’s time. Instead, the direct method is more clear in how it’s calculated and can give you a better idea of your current cash standing.

For example, a company using accrual accounting will report sales revenue on the income statement in the current period even if the sale was made on credit and cash has not yet been received from the customer. This same amount would also appear on the balance sheet in accounts receivable. Companies that use accrual accounting do not also collect and store transactional information per customer or supplier on a cash basis.

Adjustments

And so will the data you have available and the insights you hope to generate. Mastering cash flow management is something every business will benefit from. Join the 50,000 accounts receivable professionals already getting our insights, best practices, and stories every month. Target spent just over $1.4 billion on property and equipment and earned $10 million in cash from selling or disposing equipment and property. Any other cash flow from assets, such as investment income, would appear in this section. Both of these methods should leave you with the same figure, but they both take a different journey to get to that figure.

Now you know how to decide between the direct vs. indirect method of cash flow. Using the indirect method, calculate capital expenditures by subtracting last period’s fixed assets total from this period’s. For your business, this would likely include purchase of capital equipment, company vehicles, and the down payment for a new building. This is where you can see the totals for any changes in things such as your total inventory value and your accounts payable or receivable. Depreciation, a non-cash item, is often added back to the net income in the indirect method, followed by additions and deductions resulting from changes in liabilities and assets.

Direct vs. Indirect Cash Flow: What Are the Differences?

The operating section of a cash flow statement can be created using either a direct or indirect accounting method. Whether to use a direct vs. indirect cash flow statement depends on which accounting method you use. The indirect cash flow method works by taking your net profit figure from your profit and loss statement.

Although the direct method can be time consuming and tough for large businesses, with the right technology it can be done fast with a very low risk of errors. You debit accounts receivable and credit sales revenue at the time of sale. The cash flow statement reports on the movement of cash from all sources into and out of the business. Check out our guide to accelerating collections to learn more about how this type of support can help your business improve your cash flow—leading to cash flow statements that you’ll be happy to see.