IFT Notes for Level I CFA® Program
R26 Understanding Cash Flow Statements
3.3. Conversion of Cash Flows from the Indirect Method to the Direct Method
Instructor’s note: The probability of getting tested on this topic on the exam is low.
The operating cash flow from indirect method can be converted to direct by using the three-step process:
- Aggregate all the revenues and expenses.
- Remove all noncash items from aggregated revenues and expenses and break up remaining items into relevant cash flow items.
- Convert accrual amounts to cash flow amounts by adjusting for changes in corresponding working accounts.