in cash flow statement using indirect method actual net profit from income statement is adjusted for non cash items to arrive at actual cash from operating activities.
Indirect method of cash flow statement is the method under which net income from profit and loss account is adjusted for non cash items to arrive at cash flow from operating activities.
Indirect method of cash flow statement is that method in which net income calculated using normal process is adjusted for non cash items to arrive at cash flow from operating activities.
Operating Activity
Actual cash flow remains the same no matter what method is used it is just the presentation of statement and method of calculated cash flows and it does not affect amount of cash flow
Under indirect method net income from normal income statement is adjusted for non cash items to arrive at cash flow from operating activities. As salaries and purchases are already accounted for in normal income that;s why it is not reported otherwise it will count twice.
non cash transaction are adjusted while preparing for cash flow using indirect method.
Wages payable goes on the "cash flows from operating activities" Either as an add or deduct to net income (when using the indirect method)
Revaluation surplus is deducted from net income in case of net cash flow from operations using indirect method as this is not a cash related transaction.
Indirect measurement is a technique that uses proportions to find a measurement when direct measurement is not possible.
Depreciation is added back to net income in cash flow statment because it is not involve directly in reduction of cash while preparing cash flows of operating activities using indirect method.
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Cash flow from operating activity is the only activity which is calculated using two different methods that is direct method and indirect method while other two cash flows are calculated in same manner in both of methods.
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While calculating cash flow from operating using indirect method, Loss on sale of equipment is added back to net income as due to loss there is no cash outflow occurs.