indirect method

Examples of indirect method in the following topics:

• Preparation of the Statement of Cash Flows: Indirect Method

  • The indirect method starts with net-income while adjusting for non-cash transactions and from all cash-based transactions.
  • There is the direct method and the indirect method.
  • Also, in the indirect method cash paid for taxes and cash paid for interest must be disclosed.
  • The indirect method adjusts net income (rather than adjusting individual items in the income statement).
  • Explain how to use the indirect method to calculate cash flow

• Preparation of the Statement of Cash Flows: Direct Method

  • There is an indirect and a direct method for calculating cash flows from operating activities.
  • There are two different methods that can be used to report the cash flows of operating activities: the direct method and the indirect method .
  • In the indirect (addback) method for calculating cash flows, the accrual basis net income is established first.
  • The indirect method adjusts net income (rather than adjusting individual items in the income statement) for the following phenomena: changes in current assets (other than cash), changes in current liabilities, and items that were included in net income but did not affect cash.
  • The two methods to calculate cash flows are the direct method and the indirect method

• Flow of Inventory Costs

  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • The direct method of preparing a cash flow statement results in report that is easier to understand.
  • The indirect method is almost universally used because FAS 95 requires a supplementary report similar to the indirect method if a company chooses to use the direct method.
  • This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.

• Loss Contingencies

  • The indirect method adjusts net income (rather than adjusting individual items in the income statement).

• Costing Methods Overview

  • There are four accepted methods of costing items: specific identification; first-in, first-out; last-in, first-out; and weighted-average.
  • Each method has advantages and disadvantages.
  • The specific identification method of inventory costing attaches the actual cost to an identifiable unit of product.
  • Firms find this method easy to apply when purchasing and selling large inventory items such as cars.
  • This method assumes the first goods purchased are the first goods sold.

• Components of Inventory Cost

  • Labor costs include direct labor and indirect labor.
  • Indirect labor costs are the wages paid to other factory employees involved in production.
  • Other methods may be used to associate overhead costs with particular goods produced.
  • Her cost of goods sold depends on her inventory method.
  • Thus, her profit for accounting and tax purposes may be $20, $18, or $16, depending on her inventory method.

• Valuing Notes Receivable

  • Companies have two methods available to them for measuring the net value of accounts receivable: the allowance method and the direct write-off method.
  • Companies have two methods available to them for measuring the net value of accounts receivable--the allowance method and the direct write-off method.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The second method is the direct write off method.
  • Differentiate between the allowance method and the write off method for valuing notes receivable

• Reporting R&D Cost

  • In this case, the contract usually specifies that all direct costs, certain specific indirect costs, plus a profit element, should be reimbursed to the enterprise performing the R&D work.

• Gross Profit Method

  • The gross profit method uses the previous year's average gross profit margin to calculate the value of the inventory.
  • There are two methods to estimate inventory cost, the retail inventory method and the gross profit method.
  • Keep in mind the gross profit method assumes that gross profit ratio remains stable during the period.
  • The following is an example on how to calculate ending inventory using the gross profit method.
  • Explain how a company would use the Gross Profit Method to value inventory

• Specific Identification Method

  • The method does not involve any assumptions about the flow of the costs as in the other inventory costing methods.
  • Each method has advantages and disadvantages.
  • In theory, this method is the best method because it relates the ending inventory goods directly to the specific price they were bought for.
  • This method is also a very hard to use on interchangeable goods.
  • The method does not involve any assumptions about the flow of the costs as in the other inventory costing methods.