Cash Flow Statement: Definition, Direct & Indirect Methods

Reported profit is up, yet the company’s account balances only get tighter. The director asks where the money went, and the income statement does not answer, because it is accrual-based. The cash flow statement closes that gap. This article breaks down its three activities, the difference between the direct and indirect methods, and a worked example that brings the two together into a single result.

In brief: a cash flow statement is a financial statement that summarizes all of a company’s cash inflows and outflows over a period, grouped into three activities: operating, investing, and financing. Unlike the accrual-based income statement, this statement records only real cash movements, so it shows where the money came from and where it went.

The Three Activities in a Cash Flow Statement: Operating, Investing, Financing

The cash flow statement groups every cash movement into three activities that answer different questions: operating shows whether the core business generates cash, investing shows where cash is put to work for the future, and financing reveals where capital or loans come from and where dividends and repayments go.

This statement is one of the five components of a complete set of financial statements, among the types of financial statements a company is required to prepare. The standard is now numbered PSAK 207 Cash Flow Statement, a renumbering of PSAK 2, which was ratified on December 12, 2022 and took effect on January 1, 2024 (Indonesian Institute of Accountants).

What Is the Difference Between the Direct and Indirect Methods?

The difference between the two methods lies only in the operating-activities section; the investing and financing activities are built exactly the same. The direct method details gross cash receipts and payments, such as cash from customers and cash to suppliers. The indirect method starts from net income, then adjusts it for non-cash items and changes in working capital.

Whichever method you use, the operating cash flow figure is the same; only the route to it differs. The standard recommends the direct method because it is more transparent, but most practice uses the indirect method because the data is already available from the income statement and balance sheet.

Cash Flow Statement Example: Two Methods, One Result

The easiest way to understand operating cash flow is to see both methods arrive at the same figure from the same data. The indirect method adds non-cash items and changes in working capital to net income; the direct method sums up the real cash flows. In the illustration below, the two meet at Rp65,000,000.

The figures below are an illustration, continuing the example company from the income statement article: net income Rp82,000,000, depreciation (non-cash) Rp30,000,000, an increase in accounts receivable Rp40,000,000, an increase in inventory Rp25,000,000, and an increase in accounts payable Rp18,000,000.

Indirect method (operating activities):

Direct method (operating activities):

Complete statement (three activities):

Notice the gap: a profit of Rp82 million leaves only Rp5 million in additional cash after investing and financing. Even a profitable company can run out of cash if receivables pile up or cash is spent buying assets.

The Cash Flow Statement Inside the System: Real Cash from Ledger Data

In an ERP system, the cash flow statement is not rebuilt by hand every month. It is generated from general ledger data with tags that set which activity each account belongs to, so the work shifts from recapping numbers to interpreting the result. Classification consistency is kept by the system, not by people’s memory.

In SAP S/4HANA Finance, the cash flow statement is generated through semantic tags allocated to the general ledger account (G/L account) as its data source, and is available for both the direct and indirect methods. According to SAP documentation, the base formula stays the same: cash flow = operating + investing + financing.

FAQ (Frequently Asked Questions)

Which method is used more often, direct or indirect?

The indirect method is the most common because it starts from net income, which is already available in the income statement, so it is less work. The direct method is more transparent but requires gross cash data. Interestingly, the standard actually recommends the direct method, even though most practice chooses the indirect.

What is the difference between a cash flow statement and an income statement?

The income statement is accrual-based, recording revenue and expenses when a transaction occurs. The cash flow statement records real cash coming in and going out. A company can report a profit yet have negative operating cash flow; in the illustration, net income of Rp82 million becomes operating cash flow of Rp65 million.

What are cash and cash equivalents?

Cash includes physical money and bank account balances. Cash equivalents are highly liquid, very short-term investments, typically maturing in three months or less from acquisition, that are easily converted into cash with little risk of a change in value. That is what the cash flow statement tracks.

Conclusion

The cash flow statement is useful precisely because it shows real cash rather than paper profit, and whatever the method, the operating figure is the same; only the presentation differs. Reading it alongside the income statement prevents the misread of “profitable but cash-strapped.” As an SAP Platinum Partner through United VARs, with experience since 1998, Soltius implements and supports SAP S/4HANA Finance, including structuring the financial reporting on top of it.

To discuss structuring your cash flow statement and financial reporting on SAP S/4HANA Finance, visit soltius.co.id.