IAS 7Chapter 4Lesson 2
The indirect method: from profit to operating cash flow
Step 1 of 8Learning objectives
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The indirect method starts from profit or loss and adjusts it to obtain the net operating cash flow: it removes non-cash items (depreciation, provisions, deferred taxes, unrealised exchange differences, undistributed profits of associates), removes income and expenses whose cash effects are investing or financing (gain on disposal) and includes changes in inventories and operating receivables and payables. Teaching based on the wording before IFRS 18.
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Learning objectives
- Explain the logic of the indirect method, from profit to net operating cash flow.
- Calculate the net operating cash flow: non-cash items, investing or financing items, change in working capital.
- Analyse and correct an erroneous reconciliation.