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Definition

Indirect method

Indirect method is a method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash to determine net cash provided by operating activities.

The indirect method adjusts net income for items that do not affect cash. A great majority of companies (98.8%) use this method, as shown in the nearby chart. Companies favor the indirect method for tow reasons: (1) it is easier and less costly to prepare, and (2) it focuses on the differences between net income and net cash flow from operating activities.

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