Direct and Indirect method for calculating operating cash flows, explained by our business accountant in Sydney
Operating cash flows are activities that relate to the daily operations of a business, such as purchasing inventory. Businesses can report their cash flows from operating activities in a cash flow statement by either using the direct method or the indirect method. Our business accountant in Sydney have identified the differences between the two methods in the paragraph below.
The direct method refers to when a business or our small business accountants in Sydney calculate and report its cash inflows from operations followed by its cash outflows or disbursements for operations. Under the direct method, depreciation expense and gain/loss on sale of equipment are ignored, because depreciation expense is a non-cash expense. Therefore, in all business accounting in Sydney, a reconciliation of cash flows from operations to profits is required to show the depreciation expense.
When our business accountants in Zetland use the indirect method, cash flows from operating activities are reported by adjusting its profits or loss from an accrual basis to a cash basis. This requires adjustments that can be grouped into the following groups:
- Non-cash effects on profits
- Gains and losses from investing and/or financing activities
- Changes in current assets and liabilities
For more information on the direct and indirect method for calculating operating cash flows, please contact our business accountant in Sydney today.