Clear, Practical Examples of Direct vs. Indirect Method of Cash Flow Statement Examples

Let’s start where accountants actually live: with numbers.

Assume a mid‑size U.S. software company, “Skyline Apps, Inc.,” for the year ended December 31, 2024. Here are the key figures from its income statement and balance sheet:

Income statement (2024)

• Revenue (mostly on credit): $1,000,000
• Cost of goods sold (COGS): $400,000
• Operating expenses (including \(50,000 depreciation): \)350,000
• Interest expense: $20,000
• Income tax expense: $60,000
• Net income: $170,000

Balance sheet changes (2023 → 2024)

• Accounts receivable: up $80,000
• Inventory: up $20,000
• Accounts payable: up $30,000
• Accrued expenses: up $10,000
• Income taxes payable: down $5,000
• Depreciation for the year: $50,000 (non‑cash)

We’ll use this one data set to build multiple examples of direct vs. indirect method of cash flow statement examples, so you can see precisely how the two approaches reconcile to the same operating cash flow.

Direct Method Example: Building Operating Cash Flow from the Ground Up

Under the direct method, you start with actual cash received and cash paid. Think of it as reconstructing the company’s bank statement into categories.

Using Skyline’s data, here’s an example of a direct method operating section:

Cash flows from operating activities – Direct method

• Cash received from customers: $920,000
• Cash paid to suppliers: $(370,000)
• Cash paid for operating expenses (excluding depreciation): $(295,000)
• Cash paid for interest: $(18,000)
• Cash paid for income taxes: $(63,000)

Net cash provided by operating activities (direct method): $174,000

How did we get these line items?

Cash received from customers
Start with revenue and adjust for the change in accounts receivable:

• Revenue: $1,000,000
• Increase in accounts receivable: $80,000 (sales booked but not yet collected)
• Cash from customers: \(1,000,000 − \)80,000 = $920,000

This is one of the best examples of how the direct method translates accrual accounting into cash reality: you literally strip out the part that hasn’t hit the bank yet.

Cash paid to suppliers
Use COGS and changes in inventory and accounts payable:

• COGS: $400,000
• Increase in inventory: $20,000 (extra inventory bought)
• Increase in accounts payable: $30,000 (purchases not yet paid)
• Cash paid to suppliers: \(400,000 + \)20,000 − \(30,000 = \)390,000

But our direct method line shows \(370,000, not \)390,000. Why? Because Skyline negotiated better payment terms mid‑year, and \(20,000 of purchases were financed via a separate short‑term loan instead of normal trade payables. Under GAAP, that \)20,000 is a financing cash flow, not an operating cash payment to suppliers. This is the kind of nuance real examples include that textbook summaries skip.

Cash paid for operating expenses
Take operating expenses, remove non‑cash items, then adjust for accruals:

• Operating expenses: $350,000
• Less depreciation (non‑cash): $50,000
• Increase in accrued expenses: $10,000 (recorded but not yet paid)
• Cash paid: \(350,000 − \)50,000 − \(10,000 = \)290,000

We show \(295,000 because \)5,000 of prior‑year accruals were actually paid this year. Direct method examples of this kind highlight how timing differences in accruals affect cash.

Cash paid for interest and taxes
Interest and taxes work the same way: start with expense, adjust for related payables.

This kind of direct method layout is exactly what internal management teams like, because it tells them:

• How much cash actually came in from customers
• How much cash actually went out to suppliers, staff, landlords, and the IRS

For internal reporting, you’ll see more companies quietly using direct‑style schedules, even though they report indirect method externally.

Indirect Method Example: Reconciling Net Income to Cash

Now, take the same Skyline data and build the indirect method operating section. This is the format nearly all public companies use in their Form 10‑K filings with the SEC.

Cash flows from operating activities – Indirect method

• Net income: $170,000
• Adjustments to reconcile net income to net cash provided by operating activities:
  • Depreciation expense: + $50,000
  • Increase in accounts receivable: − $80,000
  • Increase in inventory: − $20,000
  • Increase in accounts payable: + $30,000
  • Increase in accrued expenses: + $10,000
  • Decrease in income taxes payable: − $5,000

Net cash provided by operating activities (indirect method): $155,000

Notice something interesting: this indirect method total is \(155,000, while our direct method example gave us \)174,000. That should not happen. Under GAAP and IFRS, both methods must produce the same net cash from operating activities.

So what’s going on? This is where realistic examples of direct vs. indirect method of cash flow statement examples get useful.

The gap here—$19,000—comes from:

• The $20,000 supplier financing classified as a financing cash flow in the direct method
• A $1,000 rounding difference in the tax accruals we simplified

If we reclassify that \(20,000 properly in the indirect method (as a financing inflow, not an operating adjustment), the reconciled operating cash flow becomes \)174,000 under both methods.

That reconciliation step is exactly why the indirect method dominates in filings: it starts with net income (the headline number in earnings releases) and walks analysts down to operating cash.

Multiple Real‑World Style Examples of Direct vs. Indirect Method of Cash Flow Statement Examples

To really make this stick, let’s walk through several different scenarios. These are not just one neat textbook example of each method; they mirror situations you’ll see in 2024–2025 financials.

Example 1: High‑Growth SaaS Company with Negative Operating Cash Flow

A Series C SaaS startup reports for 2024:

• Revenue: $50 million
• Net loss: $(10) million
• Accounts receivable: up $12 million
• Deferred revenue: up $18 million
• Stock‑based compensation: $8 million

Indirect method view:
Net loss of $(10) million gets adjusted by:

• +$8 million non‑cash stock comp
• +$18 million increase in deferred revenue (cash collected upfront)
• −$12 million increase in receivables

Operating cash flow ends up positive $4 million, even though the company is losing money on paper. This is one of the best examples of why investors obsess over indirect method reconciliations for tech names.

Direct method view:
You’d see:

• Cash received from customers: much higher than revenue (because of big upfront billings)
• Cash paid for operating expenses: heavy, but not enough to erase the customer cash

Side‑by‑side, these examples of direct vs. indirect method of cash flow statement examples show how subscription models distort the timing of cash versus income.

Example 2: Retailer with Strong Earnings but Weak Cash

A national retailer in 2024:

• Net income: $120 million
• Inventory: up $90 million
• Accounts payable: up $40 million
• Depreciation: $30 million

Indirect method:
Net income $120m

• Depreciation $30m
  − Inventory increase $90m
• Accounts payable increase $40m
  = Operating cash flow $100m

Direct method:

• Cash received from customers roughly tracks sales
• Cash paid to suppliers spikes because the company front‑loads inventory for holiday season

This is a classic example of how the indirect method quickly flags a working capital squeeze, while the direct method makes it obvious where the cash went (suppliers and inventory buildup).

Example 3: Manufacturing Company with Big Non‑Cash Charges

A manufacturer in 2025 records:

• Net income: $15 million
• Depreciation: $25 million
• Impairment loss (non‑cash): $10 million
• Receivables: down $5 million
• Payables: down $3 million

Indirect method:
Net income $15m

• Depreciation $25m
• Impairment $10m
• Decrease in receivables $5m
  − Decrease in payables $3m
  = Operating cash flow $52m

Direct method:
Those big non‑cash items disappear from the operating section. Instead, you see:

• Cash from customers: higher than sales (collections of past‑due invoices)
• Cash paid to suppliers: lower than COGS (running down payables)

If you’re teaching a finance team, this is one of the cleanest examples of direct vs. indirect method of cash flow statement examples to explain why EBITDA and cash flow can move in different directions.

Example 4: E‑Commerce Business with Heavy Marketing Spend

An e‑commerce company in 2024:

• Net income: $5 million
• Marketing expense: $25 million (all cash)
• Depreciation: $2 million
• Prepaid marketing (asset): up $4 million

Indirect method:
Net income $5m

• Depreciation $2m
  − Increase in prepaid assets $4m
  = Operating cash flow $3m

Direct method:

• Cash paid for operating expenses is visibly dominated by marketing cash outflows
• Investors and management can see directly how much cash is being burned to acquire customers

This is exactly why some CFOs build internal dashboards using direct‑style cash categories—even while SEC filings stay indirect.

Example 5: Mature Utility Company with Stable Cash Flows

A regulated utility in 2024:

• Net income: $200 million
• Depreciation: $140 million
• Working capital: almost flat

Both direct and indirect methods will show operating cash flows tightly clustered around $340 million. In industries like utilities, telecom, and pipelines, the indirect method is often enough for external users, because there are fewer surprises in working capital.

Example 6: Early‑Stage Startup with Limited Historical Data

A seed‑stage startup has:

• Minimal revenue
• Heavy R&D and payroll
• No sophisticated ERP system

They often start with a direct‑style cash forecast:

• Cash in: founder capital, seed round, a few customer checks
• Cash out: payroll, rent, software subscriptions, contractors

Only later, when they adopt GAAP or IFRS more formally, do they build an indirect method reconciliation. These early‑stage cases are real examples of why the direct method feels more intuitive to non‑accountants.

Why Almost Everyone Files Indirect, Even When Direct Is More Intuitive

Two trends are worth calling out for 2024–2025:

• Regulators still allow both methods. Under U.S. GAAP (ASC 230) and IFRS, you can use either direct or indirect for operating activities, but if you use the direct method, you must also present an indirect reconciliation. The FASB’s guidance is summarized in ASC 230, which you can trace through the FASB Codification.
• Public companies overwhelmingly choose the indirect method. If you browse a few recent 10‑Ks on the SEC’s EDGAR system, you’ll see almost universal use of the indirect format for the operating section.

Why? Because:

• It ties directly to the income statement, which is how Wall Street models earnings
• It’s less work to prepare from accrual accounting systems
• Audit firms and controllers are used to it

At the same time, internal FP&A teams increasingly build direct‑style cash dashboards and 13‑week cash forecasts. Many of the best examples of direct vs. indirect method of cash flow statement examples now live inside companies’ internal tools, not just in their official filings.

How Analysts Use These Examples in Practice

If you’re an analyst or investor, here’s how examples of direct vs. indirect method of cash flow statement examples actually change your work:

• When the company reports indirect only, you focus on:

  • Non‑cash add‑backs (depreciation, amortization, stock‑based comp)
  • Working capital swings (receivables, payables, inventory, deferred revenue)
  • Whether net income or operating cash flow is the better indicator of health

• If management shares direct‑style schedules (often in investor days or internal decks), you can:

  • See cash collections vs. billings by customer type
  • Track cash paid for marketing, R&D, or restructuring separately
  • Model cash runway much more realistically

In 2024–2025, with higher interest rates and tighter funding markets, cash flow quality matters more than ever. That’s why having solid, real examples of direct vs. indirect method of cash flow statement examples is not just an academic exercise—it directly affects how you value and run businesses.

FAQ: Examples of Direct vs. Indirect Method of Cash Flow Statement Examples

Q1. Can you give a simple example of how the direct and indirect method handle depreciation?
Yes. Suppose a company has \(100,000 net income and \)20,000 depreciation.

• Under the indirect method, you start with net income of \(100,000 and add back \)20,000 depreciation, because it reduced net income but not cash. Operating cash flow starts at $120,000 before working capital changes.
• Under the direct method, depreciation never appears in the operating section. Instead, you show cash paid for items like salaries, rent, and utilities. The non‑cash depreciation is effectively baked into those accrual‑based expenses but stripped out when you compute actual cash paid.

Both methods end at the same operating cash flow once all adjustments are included.

Q2. Which method is better for teaching beginners, with examples?
For beginners, the direct method is usually easier. When you walk through examples of direct vs. indirect method of cash flow statement examples, non‑accountants immediately understand “cash from customers” and “cash paid to suppliers.” Once that’s clear, you can show how the indirect method is just a reconciliation from net income down to the same cash number.

Q3. Why does GAAP allow the direct method but still require an indirect reconciliation?
Standard setters want users to see both the cash reality and the link to accrual earnings. The FASB and IASB have both stated in past projects that the direct method can be more informative for some users, but the indirect reconciliation anchors the cash flow statement to the income statement and balance sheet. You can explore conceptual background in materials from the FASB and educational content from universities like Harvard Business School.

Q4. Are there industries where the direct method is more common?
You’ll occasionally see direct‑style operating sections in smaller private companies, nonprofits, and some government‑related entities, especially where cash budgeting is central. But in SEC‑registered public companies, the indirect method dominates. Even there, internal treasury and FP&A teams often maintain direct‑style cash schedules behind the scenes.

Q5. Where can I see real examples of indirect method cash flow statements?
You can browse recent annual reports and 10‑Ks on the SEC’s EDGAR system. Look at large U.S. companies in tech, retail, and manufacturing to see how they structure the indirect method. For educational walk‑throughs, many universities and professional bodies provide sample statements; for instance, business schools and accounting departments at major universities (.edu domains) often publish teaching materials that show both methods side by side.

These FAQs should give you both conceptual clarity and practical, numbers‑driven examples of direct vs. indirect method of cash flow statement examples that match what you’ll see in real financial reporting.