What is indirect method in SAP FI-GL - General Ledger Accounting?

SAP Term: indirect method

• Component: FI-GL

• Component Name: General Ledger Accounting

• Description: A method of preparing the cash flow statement whereby you start with the net income and subtract the items not directly related to cash such as depreciation expense.

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• Key Concepts: 
  The indirect method is a way of calculating cash flow from operating activities in the statement of cash flows. It is used to adjust net income to reflect the actual cash flow from operating activities. This method is used when the direct method cannot be used due to the complexity of the transactions. 
  
  How to use it: 
  The indirect method starts with net income and then adjusts it for non-cash items such as depreciation and amortization, as well as changes in working capital accounts such as accounts receivable, inventory, and accounts payable. The resulting figure is the cash flow from operating activities. 
  
  Tips & Tricks: 
  When using the indirect method, it is important to make sure that all non-cash items are included in the adjustments. This will ensure that the resulting figure accurately reflects the actual cash flow from operating activities. 
  
  Related Information: 
  The indirect method is used in conjunction with the direct method when preparing a statement of cash flows. The direct method is used to calculate cash flows from operating activities by listing all major classes of gross cash receipts and payments. The indirect method is then used to adjust net income for non-cash items and changes in working capital accounts.