Operating Activities: Indirect Method
Net income is adjusted for the following:
- (1) any non-operating activities,
- (2) any non-cash expenses, and
- (3) changes in operating working capital items.
Changes in working capital accounts include increases and decreases in the current operating asset and liability accounts. The changes in these accounts arise from applying accrual accounting—that is, recognising revenues when they are earned and expenses when they are incurred instead of when the cash is received or paid. To make the working capital adjustments under the indirect method, any increase in a current operating asset account is subtracted from net income and a net decrease is added to net income.
