• DEPRECIATION is not a cash expense which was originally deducted from the profit figure in the income statement. Therefore it is logical to eliminate it by adding it back

Examples of items deducted using the indirect method in preparing  cash flow statement:

• A LOSS ON DISPOSAL OF A NON-CURRENT ASSET arising through underprovision needs to be added back and a profit deducted
• An INCREASE IN INVENTORIES means LESS CASH –  hence deducted
• An INCREASE IN RECEIVABLES means the company’s debtors have not paid as much and therefore there is LESS CASH –hence deducted
• A DECREASE in payables means the company pays off the payables/creditors again the company has LESS CASH hence deducted.