Indirect Method

Net income or loss is adjusted for the effects of

transactions of noncash nature, any deferrals or
accruals of past or future operating cash receipts
and payments, and items of income or expense
associated with investing and and financing
activities.

Begins with the accrual basis net income and
applies a series of adjustments to convert the
income to a cash basis.
General Guidelines
1. All increases in trade noncash current assets are
deducted from NI.
2. All decreases in trade noncash current assets are
added to NI
3. All increases in trade current assets are added to NI
4. All decreases in trade current liabilities are deducted
from NI
5. Depreciation, amortization and other noncash
expenses are added back to NI
6. Any gain on disposal of property is deducted from NI
7. Any loss on disposal of property is added back to NI
the direct method and indirect method are
applicable only to operating activities.

PAS 7, paragraph 21, provides that an entity
shall report separately major classes of gross
cash receipts and gross cash payments arising
from investing and financing activities using
the direct method.
Basic guidelines
a) Operating activities include the cash effects
of transactions that enter into the
determination of net income
b) Investing activities include the cash effects of
transactions involving nonoperating assets
c) Financing activities include the cash effects of
transactions involving nontrade liabilities
and equity