Driving from New York to Philadelphia via Chicago: the indirect method.
The notion also represents a way companies prepare their cash flow statements. The goal of the cash flow statement is to track how money traveled through the company during a given period of time (and how much the firm kept). The indirect method derives this information by using stats the company keeps for other reasons.
It begins with the firm's net income figure (or a net loss, if it had a bad few months) and then makes adjustments based on non-cash items that impacted the company during the time period. So, instead of starting with the cash that came into the company and subtracting cash that went out, the indirect method effectively starts at the end, looking at the total profit left over after everything got paid. Then it adds back in (or takes back out) any non-cash items that impacted the bottom line (because non-cash items don't impact cash flow, even if they affect net income).
Imagine it this way: you want to know how old someone is. The direct method would be to find out their birth date and subtract that from today's date. However, they're being dodgy about telling you their birthday. But you know their mom is 62 and she gave birth to her kid when she was 30. You can deduce (using a form of the indirect method) that the kid is 32 years old.
Similarly, the accounting version takes a less straightforward approach to get to the same answer. Ironically, though, the indirect method often turns out to be easier (not like the trip from New York to Chicago to Philly). The added simplicity comes because the figures involved all derive from other financial statements. The accountant doesn't have to find out additional information.
As long as the balance sheet and income statement are already prepared, it's just simple math to put together the cash flow statement. Thus, most accountants (wanting to get to happy hour as soon as possible), prefer the indirect method.
Related or Semi-related Video
Cost Accounting: What is Dumping?0 Views
And finance Allah Shmoop What is dumping up Oh well
yeah I guess it's like that And you might recognize
this excellent scene directed by Bob Zemeckis It won the
porcelain pony on Yeah if you never saw it or
need a refresher What is predatory pricing Well basically it's
the act of selling of a product at a price
below production cost with the intent to bankrupt competitors so
that when they're gone while the Predator can swoop in
and charge whatever pricing they want while similar to predatory
pricing dumping is the export of product from one country
to another at a price below the price at which
it sells that product domestically Alright extreme Somalia finally gets
its act together as a country and instead of spending
efforts on pirating and assisted genocide they decide to make
cars and waited diversify their guys They're funded by pirates
Are us the most profitable bank on earth and they
make trucks You know the kind You always see terrorists
CNN shots of you know huge dance bumps and scratches
but the trucks keep running just fine like even on
three wheels So Somalia makes trucks just like this and
dumps them in the U S for ten grand each
Well after five years of this dump for GM and
Toyota the Big Three truck makers are all dead Nobody
wants to pay three times what the terrorist warlord model
costs in order to buy a truck that's American made
when those Big Three or gone Somalia then raises prices
above where they were AII instead of their truck selling
for ten grand they now sell him for forty grand
reaping huge rewards So you'd ask yourself Is this bad
Is this illegal Is this even sustainable Like what if
they do dump for five years and lose billions Won't
new competition come in and destroy the company Consumers will
then have benefited from the low five year dumping prices
So it's free trade Why not let it be free
Well good questions to noodle on you know while you're 00:02:07.35 --> [endTime] dumping
Up Next
What is Differential Analysis? Differential analysis is a strategy used to make the best decision. Possible choices are compared to determine which...