Indirect Method

This method is preferred by most firms because is shows a reconciliation from reported net income to cash provided by operations.

Steps:
1. Start with net income.
2. Add back non-cash expenses. (Such as depreciation and amortization)
3. Adjust for gains and losses on sales on assets.
4. Add back losses
5. Subtract out gains
6. Account for changes in all non-cash current assets.
7. Account for changes in all current assets and liabilities except notes payable and dividends payable.


In general, utilize the following rules:

Increase in assets = use of cash (-)
Decrease in assets = source of cash (+)
Increase in liability or capital = source of cash (+)
Decrease in liability or capital = use of cash (-)