The indirect method is most commonly used and I think it’s also easier. You start with the net income from operating activities and you adjust it for the working capital and non cash items. The adjustments that you would made to the net income from operating activities using the indirect method are:
1. Add back depreciation and amortization as they are non cash items.
2. Deduct gains from non operating activities (gains from disposals etc.) or add back similar losses.
3. You calculate the difference in the accounts receivable (this year less the prior year). If it’s positive, you deduct it. If it’s negative, you add it.
4. Similarly, you calculate the difference in the accounts payable (this year less the prior year). If it’s negative, you add it while you will deduct it if it’s positive.
5. Same thing with accruals with point 4 and same thing for prepayments with point 3.