When reporting cash flows from operating activities, the indirect method first displays the net income and then shows the alterations required to transform the total net income to operating cash flows.
The indirect method helps the business owner understand the sources of cash flow, since it eliminates non-cash transactions, such as depreciation, and non-operational gains and losses, such as a gain on the sale of an item.
The indirect method also helps the business owner organize and link the income statement with the balance sheet, since it requires information from both accounts. The adjustments made on the net cash flow require the business owner to change some figures on the revenues and expenses section of the income statement, which also affects the assets and liabilities section of the balance sheet.
Since the indirect method reconciles net income with real cash flows from operating activities, it helps the business owner understand the difference between profitability and liquidity.