How to Calculate Cash Flow With the Indirect Method

by Jack Ori

Cash flow is a key component of a company's financial statement that tells investors how much cash goes in and out of the business. Accountants can calculate cash flow in two ways: the direct method and the indirect method. The direct method requires the accountant to simply subtract the total operating expenses from total operating income. The indirect method requires accountants to adjust net income for non-cash expenses. Accountants must attach an indirect method calculation to the financial statement if they use the direct method.

1. Find the net income of the company. This will be listed on the company's income statement.

2. Add non-cash expenses back to the net income. Non-cash expenses are expenses in which cash doesn't actually change hands. Depreciation is an example of a non-cash expense.

3. Add non-operating losses to the net income and subtract non-operating gains. These are gains and losses on assets that are not current.

4. Add decreases in current assets and subtract increases in current assets. Accounts receivable is an example of a current asset that affects the cash flow.

5. Add increases in current liabilities and subtract decreases. Accounts payable is an example of a current liability.

6. Write down the result of all these additions and subtractions. This is your cash flow.

Items you will need

  • Income statement
  • Calculator

Photo Credits

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