Which accounting method takes net income for a period and adjusts it based on changes in asset and liability accounts?

The indirect cash flow method takes the net income from the income statement and adjusts it for changes in asset and liability accounts to derive cash provided by operating activities. This approach begins with net income and factors in non-cash expenses, such as depreciation and amortization, as well as changes in working capital accounts, which include accounts receivable, accounts payable, and inventory levels. By making these adjustments, the indirect method provides a clearer picture of cash flow and the actual cash generated or used in operations over a specific period.

Using the indirect method is beneficial for understanding how net income translates into cash flows, as it reconciles the differences between accounting income and cash generated from operations. It helps stakeholders see the impact of operational decisions on cash flow, reflecting the financial activities and overall cash management of the business more accurately.

While other methods are relevant in the discussion of accounting and cash flow, they do not focus on adjusting net income in this way. The direct cash flow method, for example, records actual cash inflows and outflows, bypassing the need for adjustment from net income. Accrual basis accounting focuses on the recognition of revenue and expenses when they are earned or incurred rather than when cash changes hands, and cash accounting records transactions only when cash is