Indirect Method (Accounting) - Explained
What is an Indirect Method of Financial Reporting?
Written by J. Mance Gordon
Updated at April 18th, 2024
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What is the Indirect Method?
The indirect method is a method used in financial reporting in which the statement of cash flows begins with the net income before it is adjusted for the cash operating activities before an ending cash balance is achieved. The indirect method uses accrual accounting information in preparing the statement of cash flows for an accounting period. While most accountants prefer using the indirect method for financial reporting, regulatory bodies are not in favor of this method given that it does not present a clear account of cash flows for a given period.
How is the Indirect Method of Financial Reporting Used?
The indirect method is a format that many accountants use for reporting the cash flow of a given business. This method adjusts the net income to get the actual amount of cash that business activities generate. There are three divisions of cash flows in the indirect method, they are;
- Cash flows from operating activities
- Cash flows from financing activities
- Cash flows from investing activities
Stakeholders and investors often pay attention to the indirect method. The indirect method is commonly used to determine how a business generates cash and how the cash generated is disbursed or used.