---
title: "Cash flow statement (indirect method)"
description: "What the cash flow statement shows, operating, investing and financing activities, how the indirect method reconciles net profit to cash, with a worked example."
canonical: https://ledgeriano.com/glossary/cash-flow-statement
language: en
publisher: "Ledgeriano"
updated: 2026-11-06
---

# Cash flow statement (indirect method)

> What the cash flow statement shows, operating, investing and financing activities, how the indirect method reconciles net profit to cash, with a worked example.

The cash flow statement explains how a business's cash changed during a period, split into operating, investing and financing activities. Under the indirect method, it starts from net profit, adds back non-cash items such as depreciation and adjusts for changes in working capital to reach cash generated by operations.

Operating activities cover the cash effect of everyday trading. Investing activities cover buying and selling long-term assets. Financing activities cover loans, repayments, share issues and dividends. Together they reconcile opening cash to closing cash on the balance sheet.

The indirect method is popular because it shows why profit and cash differ. Rising receivables and inventory absorb cash; rising payables release it. A profitable company with fast-growing receivables can still run out of cash, which is why lenders read this statement first. The [cash conversion cycle calculator](https://ledgeriano.com/tools/cash-conversion-cycle-calculator) shows the same effect in days.

Ledgeriano prepares the cash flow statement with the indirect method from posted entries. Classify accounts carefully: a loan booked to an operating payable account will land in the wrong section.

```
Cash from operations = Net profit + Non-cash expenses - Increase in receivables and inventory + Increase in payables
Net change in cash = Operating + Investing + Financing
```

## Example: indirect method

Net profit of 38,000 turns into 31,000 of operating cash once depreciation and working capital changes are reflected; equipment purchases and loan repayments bring the net change to 6,000.

| Line | Amount |
| --- | --- |
| Net profit | 38,000 |
| Add: depreciation | 9,000 |
| Increase in trade receivables | (12,000) |
| Increase in inventories | (6,000) |
| Increase in trade payables | 2,000 |
| **Net cash from operating activities** | **31,000** |
| Purchase of equipment | (15,000) |
| **Net cash used in investing activities** | **(15,000)** |
| Loan repayments | (10,000) |
| **Net cash used in financing activities** | **(10,000)** |
| **Net increase in cash** | **6,000** |

### What is the difference between the direct and indirect method?

The direct method lists cash received from customers and paid to suppliers and staff. The indirect method starts from profit and adjusts it. Both give the same operating cash flow; the indirect method is far more common.

### Where do interest and dividends go?

IFRS allows a choice for interest and dividends paid and received, applied consistently. Under US GAAP interest paid is operating and dividends paid are financing.

Guide: https://ledgeriano.com/guides/financial-statements