Join Jim Stice for an in-depth discussion in this video Using cash flow data to highlight important accounting assumptions: indirect, part of Running a Profitable Business: Understanding Cash Flow.
- Let's see why the indirect method is so much better…than the direct method.…Now go back to the same matrix,…the same operating cash flow calculations.…We will use these same calculations to provide the data…to prepare the indirect method of reporting…operating cash flow.…With the indirect method, we start with net income…which of course reflects the impact of all…of the revenues and expenses.…And then we report all of the adjustments…in the middle column of the matrix.…The key point is that we are using the same calculations…but just reporting the line-by-line changes or adjustments…instead of the line-by-line total results.…
Here's what the indirect method looks like.…We start with net income of 125,…then we subtract the increase in accounts receivable,…minus 130.…We also subtract the increase in inventory of minus 10,…because those two items consume cash.…We add the increase in accounts payable of plus five,…because we're preserving our cash.…And then we add back depreciation of 25…because that's not a cash expense,…
Want to hear more from Jim and Kay? Learn about all three types of accounting—financial, managerial, and income tax—in their Accounting Fundamentals course.
- Differentiating between net income and operating cash flow
- Categorizing cash flow
- Using financial data to deduce cash flow
- Managing operating, investing, and financing cash flows
- Typical cash flow patterns
- Converting net income into operating cash flow
- Improving operating cash flow
Skill Level Intermediate
1. The Importance of Cash Flow Analysis
2. Overview of the Statement of Cash Flows
3. Using Cash Flow Data to Make a Loan Decision
4. Converting Income Statement Data into Operating Cash Flow Data
5. Managing Cash Flow
6. Cash Flow Numbers for Some Real Companies
The danger of free cash flow3m 56s
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