Indirect method

The indirect method prepares the operating section of the cash flow statement by starting from net profit and adjusting for non-cash items such as depreciation and working capital movements to arrive at operating cash flow.

ByHoang TruongUpdated July 3, 2026

FrameworkCash flow statement

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Starting from net profit of €150,000, the indirect method adds back non-cash depreciation of €40,000 and the €15,000 rise in payables, then deducts a €25,000 increase in receivables and €20,000 of tax paid, arriving at operating cash flow of €160,000.

Where it fits

SubjectFinancial AccountingCoreTopicThe Financial StatementsCore

The formula

LaTeX

\text{Operating CF} = \text{Net Profit} + \text{D\&A} \pm \Delta \text{Working Capital} - \text{Tax Paid}

Variables

$N e tP r o f i t$: Profit after tax per the income statement (€)
D&A: Depreciation and amortisation — non-cash charges added back (€)
$Δ W or k in g C a p i t a l$: Net change in receivables, payables, inventory and other working capital; negative if working capital increases (cash absorbed) (€)
$T a x P ai d$: Corporation tax paid in cash during the period (€)

Abbreviated form of the indirect-method reconciliation; interest paid may be deducted here or classified in financing activities depending on the entity's accounting policy under IAS 7.

Check yourself

PracticeCORE

Pelham Ltd prepares its cash flow statement using the indirect method. Net profit is €420,000. During the year, trade receivables increased by €35,000 and trade payables increased by €18,000. Ignoring all other adjustments, what is cash generated from operations?

Select an answer to check your understanding.