CFO direct Vs Indirect method

Hey, I know this is not a good time to ask such a silly question. But I would be really thankful if anyone can list down the exact items that need to be taken note of when calculating the CFO under indirect and direct method and what is the major difference between the two of them in calculations. I somehow tend to get confused with the interest expense, interest income, dividend expense and so on and where does it flow from. I have learnt a lot from this forum. Thanks in advance. Cheers, Ram

the way i see it is (and i could be wrong): INDIRECT: Net Income adjust for non-cash items in the P/L statement adjust for changes in working capital (current A/L) DIRECT: Sales Minus COGS adjust for changes in working capital so if you think about it (this took me a while), SALES-COGS = GROSS PROFIT, which is equal to NET INCOME (adjusted for non-cash items in P/L) and THIS is why CFO is the same, no matter which method you use…

Bluey Sales - COGS = Gross Profit Gross Profit - SG&A Expense = EBIT EBIT - Interest = EBT EBT - Tax = NI or EBIT ( 1 - t) = NI

cpk123 Wrote: ------------------------------------------------------- > Bluey > > Sales - COGS = Gross Profit > Gross Profit - SG&A Expense = EBIT > EBIT - Interest = EBT > EBT - Tax = NI > > or EBIT ( 1 - t) = NI Shouldn’t that be EBT(1-t) = NI?

Chrismaths, you are right. EBT ( 1-T) or (EBIT - Int) ( 1-T)

Basically, indirect starts with net income (a number that is not all cash and not all operating related) and backs out the pieces that don’t belong there (like gains and losses on asset sales), and adjusts to show the true cash effect of other items that are included in net income (like adjusting accrual-based sales to a cash figure by the change in accounts receivable). The direct method is just that. Direct. No starting with numbers that are off and adjusting them. What did you collect in cash from customers? What did you pay vendors? etc…