 Hello, in this lecture we will define indirect method. According to fundamental accounting principles Wild 22nd edition, the definition of indirect method is 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. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. So obviously when we are looking at the indirect method we are considering the statement of cash flows and the statement of cash flows can be done in two different general ways those ways being the indirect method and the direct method. The indirect method is actually a bit more common for a few different reasons. One is that we have already calculated net income therefore it makes sense for us to start with net income and kind of back into the cash flows from operated operations on it more of a cash basis. It also shows that difference which we like to see the difference between the cash flows from an accrual basis in terms of net income and from a cash basis. So that that change is something that can be useful. Also some regulations will require that the indirect method be used even if the direct method is used therefore the indirect method will be often used because of because of that regulatory requirement. The difference between the direct method and the indirect method has to do with the cash flows from the operating activities. The operating activities are going to be the cash flows from the actual operations of the business similar to the income statement being the statement that reports the accrual basis net income bottom line from the activities of the business. Therefore it would make sense to think of the cash flows from operations by basically taking the income statement and put it on a cash basis meaning rather than having revenue according to the revenue recognition principle we convert it to revenue based on cash receipts and then we convert all expenses rather than being on a cash on a matching principle on a accrual basis. We have it based on cash payments that would be the direct method. The indirect method is going to say hey we already calculated net income let's start with net income up top then let's look for all those factors that are not accrual that are not cash related and pull those out showing the difference between net income on an accrual basis and net income that would be on a cash basis that basis being called net cash flow from operating activities in essence that's the operating section of the cash flow statement the other two sections being cash flows from investing activities cash flows from financing activities those do not change whether we are using the direct method or the indirect method they will be the same representing cash flows related to those two activities. In order to calculate this in order to put this together we would typically take like a balance sheet from the prior year and the current year we are working put them side by side I've just put them side by side we and then took out all the subtotals basically put it back into a debit and credit format and then if we take the difference between all those accounts the difference between a point in time last year and a point in time this year balance sheet last year balance sheet this year is the activity the summation of basically the activity that happened so that's usually the starting point that will use a worksheet such as this to help construct the statement of cash flows.