This is a continuation of the article about the Statement of Cash Flows: Direct or Indirect Method. It explains with examples both, the direct and indirect methods.

Direct Method
Corporation XYZ, LLC
Statement of Cash Flows
for the Year Ending December 31, 2007

colspan="5" scope="colgroup">Cash Flows from Operating Activities
Cash receipts from customers	2,500
Cash paid for payroll and payroll taxes	(850)
Interest earned from an investment	75
Net cash provided by operating activities	1,725	Cash Flows from Investing Activities
Sale of investment	1,000
Purchase of fixtures and furniture	(519)
Net cash provided by investing activities	481
Cash Flows from Financing Activities
Payment of dividends	(600)
Issuance of long-term debt	5, 500
Net cash provided by financing activities	4,900
Net increase in cash	7,106
Cash at the beginning of the period	2,350
Cash at the end of period	9,456
Non-cash investing and financing activities
Exchange of a truck for common stock	3,780

Indirect Method

The indirect method, in brief, adds back to the net income the non-cash expenses and losses and subtracts the non cash revenues and gains. The indirect method is called the reconciliation method. It reconciles net income for items that did not affect cash but affected reported net income.

Regardless of using the direct or the indirect method the net cash provided by operating activities is the same.

The format suggested under the indirect method is as follows:
















To determine the Net Cash from Operating Activities, the starting point is net income. To this amount add of subtract as follows (Source: Kieso, Donald E. and Jerry J. Weygandt and Terry D. Warfield Intermediate Accounting Volume II - Page 1220

Net Income	2,800
Depreciation expense	2,200
Decrease in accounts receivable	4,000
Increase in prepaid expense	(1,350)
Increase in accounts payable	8,422
Net cash provided by operating activities	16,072

Net Income
Additions	Deductions
Depreciation expense	Amortization of bond premium
Amortization of intangibles and deferred charges	Decrease in deferred income tax liability
Amortization of bond discount	Income on investment in common stock using equity method
Increase in deferred income tax liability	Gain on sale of plant assets
Loss on investment in common stock using equity method	Increase in receivables
Loss on sale of plant assets	Increase in inventories
Loss on write-down of assets	Increase in prepaid expenses
Decrease in receivables	Decrease in accounts payable
Decrease in inventories	Decrease in accrued liabilities
Decrease in prepaid expenses
Increase in accounts payable
Increase in accrued liabilities
Net Cash from Operating Activities

The additions and deductions listed above reconcile net income to net cash flows from operating activities, which justifies the reason for referring to the indirect method as the reconciliation method.