Indirect Method Cash Flow Statement: Format and Example

An indirect method cash flow statement starts from the operating result, adjusts for non-cash items and balance sheet movements, and ends on the change in cash and cash equivalents. It is the third component of financial reporting, alongside the profit and loss account and the balance sheet.

For a controller, it is the only statement that explains how a profitable year can end with less money in the bank. The P&L measures performance and the balance sheet measures position; this statement bridges the two and shows how much of the reported profit actually turned into cash. For the formulas behind the individual cash flows, see cash flow calculation; this article covers the document itself: format, preparation, reconciliation and interpretation.

What a cash flow statement contains

The statement has three cash flows and one closing line that ties them to the bank:

• Operating activities: the cash the business itself generated or consumed, including movements in working capital, interest paid and income tax paid.
• Investing activities: purchases and disposals of tangible and intangible fixed assets and of participations.
• Financing activities: new and repaid loans, shareholder contributions and dividends paid.
• Movement in cash: the sum of the three, which must equal the difference between opening and closing cash.

That final line is what makes the statement verifiable. A profit and loss account cannot be checked against an external source, but this one can: it ends on a figure that also appears on the bank statement. That is why it belongs in management reporting and not only in the annual accounts.

Reporting requirements differ by framework. Under IFRS, IAS 7 requires a cash flow statement from every reporting entity. Under Dutch GAAP, guideline RJ 360 requires one from medium-sized and large legal entities, while small entities are exempt. Size thresholds are revised periodically, so test them per financial year. The obligation covers the annual accounts only – but a controller who prepares the statement once a year gives up eleven months of signal.

How the indirect method cash flow statement works

In the indirect method you do not start from bank movements. You start from the result and work back to cash, in a fixed sequence:

1. Start with the operating result (EBIT). Some formats start from net profit instead; then interest and tax are adjusted at the top rather than further down.
2. Add back non-cash charges: depreciation, amortisation, movements in provisions and unrealised revaluations.
3. Process the movements in working capital: inventories, receivables, payables and other short-term positions. A rising asset consumes cash, a rising liability releases it.
4. Deduct interest paid and income tax paid. That gives cash flow from operating activities.
5. Present investing and financing cash flows below it, and close on the movement in cash.

The direct method presents the same result from actual receipts and payments per category. It reads more easily, but it requires a level of cash bookkeeping most general ledgers do not deliver on their own. That is why the indirect format is the reporting standard, while the direct layout belongs to forward-looking work: a cash budget or a 13-week cash flow plan works with expected receipts and payments. The difference is direction: a forecast looks ahead, this statement looks back.

Preparing an indirect method cash flow statement from two balance sheets

You need three inputs: the opening balance sheet, the closing balance sheet and the profit and loss account in between.

1. Put both balance sheets side by side and calculate the movement per line.
2. Assign every movement to one of the three cash flows. Fixed assets go to investing, loans and equity to financing, the rest to operating.
3. Strip out the movements that never involved cash: currency translation differences, revaluations, the book gain or loss on a disposal, additions to provisions, and balances that entered the accounts through an acquisition.
4. For a disposal, report the actual proceeds in the investing cash flow – not the carrying amount and not the book gain.
5. Add up the three cash flows and compare the total with the movement in cash. The two must match.
6. If a difference remains, look for it in the items from step 3 and in the current portion of long-term debt, the classic place where a financing movement ends up inside working capital.

In Smartbooks this sits as its own tab next to the P&L and the balance sheet: the Cash Flow tab in Financial Accounts is structured around the indirect method, using historical results and balance sheet movements to calculate cash flow. In the report configurator you set a table card's data source to Cash Flow to show the statement, next to actuals or next to a cash flow forecast.

Indirect method cash flow statement example

A full statement for a trading company over one financial year:

Line	Amount
Operating result	€ 420,000
Depreciation and amortisation	€ 180,000
Movement in provisions	€ 25,000
Movement in inventories	−€ 60,000
Movement in trade receivables	−€ 140,000
Movement in trade payables	€ 75,000
Movement in other current liabilities	€ 15,000
Cash flow from operations	€ 515,000
Interest paid	−€ 45,000
Income tax paid	−€ 80,000
Cash flow from operating activities	€ 390,000
Capital expenditure	−€ 310,000
Proceeds from disposals	€ 35,000
Cash flow from investing activities	−€ 275,000
New long-term loan	€ 150,000
Repayment of long-term loans	−€ 120,000
Dividend paid	−€ 100,000
Cash flow from financing activities	−€ 70,000
Movement in cash	€ 45,000
Cash at start of year	€ 215,000
Cash at end of year	€ 260,000

The three cash flows add up to € 45,000, exactly the difference between € 215,000 and € 260,000. Until that line holds, the statement is not finished.

How to read the statement

Three comparisons in an indirect method cash flow statement tell you at a glance how the company is doing.

• Operating cash flow against net profit. In the example, € 390,000 of operating cash flow against roughly € 280,000 of net profit: profit is converting into cash. When that ratio stays below 1, the result is stuck in receivables or inventory – the kind of gap a variance analysis should explain.
• Investing cash flow against depreciation. Here € 275,000 net against € 180,000 of depreciation: more is being replaced than written off, so capacity is growing. If investment lags depreciation for years, profit is being flattered by an ageing asset base.
• Financing cash flow. Negative is healthy here: loans are repaid and a dividend is paid, both funded by operations. If financing instead carries operations, the company is staying afloat on other people's money.

Negative operating cash flow alongside a positive result is the signal to investigate first. It usually sits in working capital, which is one line in this statement but often the largest one.

Pitfalls

• Counting the book gain on a disposal twice: once inside the result and again in the proceeds. Strip out the gain and report only the cash received.
• Treating a balance sheet movement as a cash flow when no money moved: translation differences, revaluations and the opening balance of an acquired entity.
• Reading depreciation as a source of cash. It is added back because it reduced profit without an outflow, not because it generates money.
• Classifying a bank overdraft within cash one year and within financing the next. Pick one treatment and apply it to the comparative year too.
• Preparing the statement only at year-end. Include it in the month-end close and the reconciliation to the bank becomes a check instead of a search.

Frequently asked questions

What is an indirect method cash flow statement?

A cash flow statement derived from the profit and loss account and the movements between two balance sheets, rather than from recorded receipts and payments. It explains the change in cash and cash equivalents over the period, split into operating, investing and financing activities.

How do you prepare a cash flow statement?

Compare two consecutive balance sheets, calculate the movement per line and assign each movement to one of the three cash flows. Start from the operating result, adjust for non-cash items and working capital movements, then check that the total equals the change in cash.

Who is required to include a cash flow statement?

Under IFRS, IAS 7 requires one from every reporting entity. Under Dutch GAAP, RJ 360 requires it from medium-sized and large legal entities and exempts small ones. Thresholds change periodically, so verify them for each reporting year.

A controller who rolls this statement out of the reporting system every month, instead of rebuilding it once a year in a spreadsheet, has an explanation ready a month after the close rather than a question. More articles on reporting and cash flow are in the knowledge center.