The indirect approach to presenting operating activities

Although accounting standards encourage the direct approach, most companies actually present an indirect statement of cash flows. The indirect approach is so named because the “reconciliation” replaces the direct presentation of the operating cash flows. Except for the shaded areas, this statement is identical to the direct approach. The first shaded area reflects the substitution of the operating cash flow calculations. The second shaded area reflects that the indirect approach must be supplemented with information about cash paid for interest and taxes.