Statement of Cash Flows (Indirect Method): Step-by-Step With Full Example
Worked Example · Intro Financial Accounting
Statement of Cash Flows (Indirect Method): Step-by-Step With Full Example
This cash flow statement indirect method example shows the whole process: start from net income, add back non-cash items (like depreciation), remove gains/losses that belong elsewhere, then adjust for changes in working capital. Do that and your operating cash flow will reconcile to the change in cash — every time.
The 3 adjustments (the rule you actually need)
The indirect method only reworks the operating section. Here’s the full rule for working-capital changes:
| Balance-sheet change | Effect on cash |
|---|---|
| Current asset ↑ (e.g., A/R rises) | Subtract |
| Current asset ↓ (e.g., inventory falls) | Add |
| Current liability ↑ (e.g., A/P rises) | Add |
| Current liability ↓ (e.g., accruals fall) | Subtract |
Full worked example
Assume Maple Ltd. reports net income of $84,000, plus: depreciation $22,000; a $5,000 gain on sale of equipment; A/R up $12,000; inventory down $7,000; A/P up $9,000; accrued liabilities down $3,000. It also bought equipment for $60,000, sold old equipment for $18,000, issued $30,000 of long-term debt, and paid $16,000 in dividends. Opening cash was $40,000.
| Cash from operating activities (indirect) | |
|---|---|
| Net income | $84,000 |
| + Depreciation | 22,000 |
| − Gain on sale of equipment | (5,000) |
| − Increase in accounts receivable | (12,000) |
| + Decrease in inventory | 7,000 |
| + Increase in accounts payable | 9,000 |
| − Decrease in accrued liabilities | (3,000) |
| Cash from operating activities | $102,000 |
| Investing & financing, then reconcile | |
|---|---|
| Purchase of equipment | $(60,000) |
| Proceeds from sale of equipment | 18,000 |
| Cash used in investing | (42,000) |
| Long-term debt issued | 30,000 |
| Dividends paid | (16,000) |
| Cash from financing | 14,000 |
| Net change in cash (102,000 − 42,000 + 14,000) | $74,000 |
| Opening cash → Ending cash | $40,000 → $114,000 |
The mistake that costs the most marks
Double-counting the equipment sale. The $5,000 gain is already inside net income, but it’s an investing event — so you back it out of operating and report the full $18,000 proceeds under investing. Miss that and both sections are wrong.
Frequently asked questions
How do you prepare a cash flow statement using the indirect method?
Start with net income, add back non-cash expenses (depreciation/amortization), remove non-operating gains or losses, then adjust for changes in current assets and current liabilities. That gives operating cash flow; add investing and financing to reconcile to the change in cash.
Why do you add back depreciation?
It reduced net income but no cash left the business — so you add it back to undo a non-cash expense.
Indirect vs direct method — what’s the difference?
Same operating cash flow, different presentation. Indirect starts from net income and adjusts; direct lists actual cash receipts and payments. Most Canadian companies use indirect.
Do gains get added or subtracted?
Subtracted in operating (they’re non-operating), with the full sale proceeds shown in investing.
Stuck on the cash flow statement?
It’s the single most-tutored intro topic. Work through it live with a tutor until it clicks.
