Final answer:
The Indirect method is used to adjust net income to calculate net cash provided by operating activities. It accounts for non-cash items and changes in working capital. This method offers a reconciliation from net income to cash flow from operations.
Step-by-step explanation:
The indirect method adjusts net income to find net cash provided by operating activities. This is opposed to the direct method, which instead lists all the cash payments and receipts, including cash paid to suppliers, cash receipts from customers, and cash paid in salaries. The indirect method starts with net income and then adjusts for all non-cash items and the changes in working capital accounts on the balance sheet to arrive at the cash flow from operating activities.
For example, depreciation expense is added back to net income in the indirect method, because it is a non-cash expense that reduced net income but did not affect cash. Similarly, changes in inventory, accounts receivable, and accounts payable are adjusted for, since they represent changes in working capital that impact cash flow.