Wize University Introduction to Financial Accounting Textbook > The Cash Flow Statement
Operating Activities Section (Indirect Method)
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Operating Activities (Indirect Method)
The indirect method is the more widely used format for determining operating cash flows. Net income is adjusted to determine net cash from operations.
Adjustments to Net Income
- Add back non-cash items like:
- Depreciation and amortization expense
- Bad debt expense
- Depletion expense
- Reverse gains and losses from non-operating activities
- Add back losses
- Subtract gains
- Adjust for changes in working capital
- Subtract increases to working capital
- Increase in current assets
- Decrease in current liabilities
- Add decreases to working capital
- Decrease in current assets
- Increase in current liabilities
Watch Out!
Although Short-term investments and Dividends payable are current, they are not considered when determining cash from operating activities.
What it looks like
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Example: Operating Activities (Indirect Method)
The following financial statements are available for Wizedemy Inc. for the years ended June 30th, 2024 and 2025.
Prepare in proper form the operating activities section of the statement of cash flows using the indirect method.
Mark Yourself Question
- Grab a piece of paper and try this problem yourself.
- When you're done, check the "I have answered this question" box below.
- View the solution and report whether you got it right or wrong.
Practice: Operating Activities (Indirect Method)
The following financial statements are available for KG Corp. for the year ended December 31st, 2020:
Additional Information
- Purchased new equipment for $700,000, paying 80% in cash and issuing common shares for the balance.
- Sold equipment for cash.
- Sold long-term investments for $48,000 in cash.
Prepare in proper form the operating activities section of the statement of cash flows using the indirect method.