Cash Flow Statement (Indirect Method): Worked Example
Worked Example · Intermediate Accounting
Statement of Cash Flows: the Indirect Method, Step by Step
The indirect method starts at net income and reverses everything that isn’t cash: add back non-cash expenses (like depreciation) and adjust for changes in working capital. The marks disappear when students add back the wrong items or flip a working-capital sign.
Net income → cash from operations
| Operating activities (indirect) | Amount |
|---|---|
| Net income | 104,000 |
| + Depreciation (non-cash) | 38,000 |
| − Increase in accounts receivable | (22,000) |
| + Increase in accounts payable | 15,000 |
| Cash from operating activities | 135,000 |
The sign rules that trip people up
| Balance-sheet change | Effect on cash |
|---|---|
| Current asset ↑ (A/R, inventory) | Subtract |
| Current asset ↓ | Add |
| Current liability ↑ (A/P, accruals) | Add |
| Current liability ↓ | Subtract |
Confused about a sign in your own problem? A tutor can walk your own numbers — book a session.
The mistake that costs marks
Treating an increase in accounts receivable as cash in. Sales raised net income, but the cash hasn’t arrived — so a rising receivable is subtracted. Same trap in reverse for payables.
Frequently asked questions
Why add back depreciation?
It reduced net income but never used cash, so you reverse it to get back to a cash figure.
Where do interest and dividends go?
Under IFRS you get a policy choice (operating or financing/investing); apply it consistently and disclose it.
Direct vs indirect — same answer?
Yes — cash from operations is identical. Only the operating section’s presentation differs; most companies use indirect.
Reconciling cash flows?
Work the operating section from a comparative balance sheet, 1-on-1.
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