What is Indirect Method of Cash Flow?
The indirect method is one of two presentations of the operating section of the cash flow statement under IAS 7, starting with net income and adjusting for non-cash items, gains and losses, and changes in working capital to arrive at net cash from operations.
How It Works
- Start with net income from the income statement.
- Add back non-cash charges (depreciation, amortization, provisions, share-based payments).
- Reverse non-operating gains and losses (FX, asset disposals).
- Adjust for changes in working capital (receivables, inventory, payables).
Saudi Context
Almost every Tadawul-listed company presents the operating section using the indirect method because it ties directly to the IFRS income statement filed with ZATCA. Auditors prefer the indirect method since it preserves the audit trail from net income to cash and is easier to reconcile against the trial balance.
Example
A Saudi retailer reports net income of SAR 12,000,000, depreciation of SAR 3,000,000, an increase in receivables of SAR 1,500,000, and an increase in payables of SAR 800,000. Operating cash flow = 12,000,000 + 3,000,000 – 1,500,000 + 800,000 = SAR 14,300,000.