Indirect Method Definition – What is Indirect Method?

Accounting Glossary 

Indirect method definition. Analyzing the definition of key terms often provides more insight about concepts. Indirect method activities can be defined as – Presentation that reports net income and then adjusts it by adding and subtracting items to yield net cash from operating activities on the statement of cash flows. The indirect method can be contrasted to the direct method in the formation of the statement of cash flows. Although, the direct method seems more intuitive the indirect method is more widely used, partly because of regulations and partly, partly because we have already calculated net income using an accrual method, and partly because the indirect method provides a useful comparison of net income on an accrual basis and net income on a cash basis. When comparing the direct method and the indirect method we are concentrating on the first section of the statement of cash flows. The second two sections of the statement of cash flows will remain the same under both the direct method and indirect method. The indirect method starts with net income, a number calculated on the income statement, and then adjusts for items that are not cash related.