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2.4.2. Indirect Method
According to Alfredson et al (2005, p.593), when referring to paragraph 18 of
IAS 7, the
indirect
method
is defines as
the
method which
is
used
in preparing
a
cash
flow statement
in
which
the
net profit or
loss
is adjusted
for
the effects
of non-cash transactions, any
past of future deferrals or accruals of operating
cash
receipts or payments, and any
income or expense
items related
to
investing
or
financing
activities
of the
cash
flow.
On
the
other
hand,
the
beginning and ending balance sheet as well as the income statement are
required in order to prepare for statement of cash flow using direct method. To
what we understand, the statement of cash flow-indirect method always begin
with
the
net
income due
to the
fact that the
revenues and expenses affected
the
net
income
produce
the
cash
receipts
and cash
payments.
Conversely,
the
net
cash being used or provided in the operating activities –indirect method is the
net profit which needs to be adjusted to convert certain items to the cash basis.
Next,
when referring to Weygandt et al (2007, p.751) most entities are using
indirect
method
due
to
its
simplicity and
conveniences.
On
the
other
hand,
Weygandt et al (2007, p.751) also concludes that most companies are
implementing
accrual
basis
for
their
accounting
report.
In accordance
with
IASB
framework,
accrual
basis
can only
recognized
the
effect
of
transaction
only after the transaction had been occurred. To what we can conclude, the
income
earned
by
the
company
may
include
the
credit
sales
which
have
not
been paid in cash or the expense incurred may include some items which have
not been paid. The above reasons reveal the facts that net profit is not the same
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