5 Steps to Calculating Indirect Operating Cash Flow (2024)

FAQs

How to calculate indirect operating cash flow? ›

Indirect method

The indirect method formula is:Operating cash flow = (revenue – cost of sales) + depreciation – taxes +/- change in working capitalWhere: Revenue is the amount of money an organization earns from sales during the accounting period.

Example of the Indirect Method

For example, if a customer buys a $500 widget on credit, the revenue is recognized in the month of the sale, even though the cash hasn't yet been received. The indirect method of the cash flow statement adjusts net income to reflect actual cash inflows and outflows during the period.

Cash flow from operating activities = Net income + depreciation expense + decrease in accounts receivables – increase in inventory + increase in accounts payable. Net income, depreciation expense, decrease in AR, and increase in AP are cash inflows.

Formulas of the Direct Method

Cash Received from Customers = Sales + Decrease (or - Increase) in Accounts Receivable. Cash Paid for Operating Expenses (Includes Research and Development) = Operating Expenses + Increase (or - decrease) in prepaid expenses + decrease (or - increase) in accrued liabilities.

Answer and Explanation:

When using the indirect method to calculate and report the net cash provided or used by operating activities, net income is adjusted for all but c) changes in noncurrent assets and noncurrent liabiliies.

Indirect cash flow forecasting is a method of estimating future cash flows based on an analysis of past financial results. This forecasting type looks at income and balance sheet items such as sales, expenses, assets, liabilities, and equity.

Step 5: Worksheet

A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made. In addition to identifying any errors, adjusting entries may be needed for revenue and expense matching when using accrual accounting.

How to calculate operating cash flow? ›

Cash-on-cash returns are calculated using an investment property's pre-tax cash inflows received by the investor and the pre-tax outflows paid by the investor. Essentially, it divides the net cash flow by the total cash invested.

The resulting indirect rate is called an overhead rate. Now, calculate each department's share of the total indirect costs by multiplying each department's total direct costs by the overhead rate.

Under the indirect method, since net income is a starting point in measuring cash flows from operating activities, depreciation expense must be added back to net income. Companies may add other expenses and losses back to net income because they do not actually use company cash in addition to depreciation.

Under the direct cash flow method, you subtract cash payments, such as payments to suppliers, employees, cash receipts operations and customer receipts, during the period. This determines the net cash flow from the company's operating expenses.