Indirect method (cash flows)
The indirect method reconciles an appropriate profit subtotal to operating cash flows. Adjust for non-cash charges such as depreciation, remove income and expenses whose cash flows belong elsewhere, and adjust operating working capital. Under the IFRS 18-amended IAS 7 model, operating profit is the starting point. Then present other required operating cash flows, applying the current classification requirements.
Worked example
Starting with operating profit of $20,000, add depreciation $3,000, subtract a $2,000 receivables increase and add a $1,000 payables increase: cash generated is $22,000 before other adjustments.
Common mistake
A rise in operating receivables reduces operating cash, while a rise in operating payables normally increases it; neither changes revenue or expense solely because cash differs.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | FR | Direct | Official assessment-window verification pending |
| ACCA | K1 | Direct | July 2027–August 2028 |
| CIMA | BA3 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |
Related terms
Also called: Indirect method, Indirect cash flow method