Unformatted text preview: may be affected by rounding.)
What you end up with here is a relatively simple cash plan using the direct method to calculate the
cash. The direct method means that you add the new sources of cash and subtract the uses of cash,
and you have an estimated ending Cash Balance for each month. Indirect Cash Flow Method
An alternative cash ﬂow method, called indirect, projects cash ﬂow by starting with net income and
adding back depreciation and other non-cash expenses, then accounting for the changes in assets and
liabilities that aren’t recorded in the income statement.
This methodology produces a Sources and Uses of Cash statement as shown on the following page.
The results should be identical, for either direct or indirect methods, because the underlying cash ﬂow
is identical. CHAPTER 16: CASH IS KING THE INDIRECT METHOD PRODUCES SOURCES 16.9
AND USES OF CASH The indirect method starts with net income and then adjusts for all the sources and uses of cash
that aren’t part of the income calculation. Results should be the same for either direct or indirect.
(Amounts shown in thousands. Numbers may be affected by rounding.) Direct vs. Indirect: Which to Use?
What’s most important in cash planning is the forecast of the cash balance. The experts can argue
about direct vs. indirect (and theory and fashions DO change), but in the end either method will come
to the same cash balance, if properly applied. Choose whichever method seems more natural to you.
Some people are comfortable with estimating balances, others prefer to estimate payments made or
payments received. For example:
• Suppose you prefer to estimate ending balances using simple assumptions. If you wait an average of 60 days (called collection days) to receive money from customers, then your normal
end-of-month accounts receivable will be twice the month’s sales on credit. That calculation
tool and estimator makes the indirect method better. • However, you might prefer to estimate payments received by making the payme...
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