What is a key usefulness of the indirect method of cash flow reporting for stakeholders?

The indirect method of cash flow reporting is particularly helpful for stakeholders in assessing how effectively a company manages its working capital. This method starts with net income and makes adjustments for changes in non-cash items and working capital accounts, such as accounts receivable, inventories, and accounts payable. By presenting operating cash flows in this way, stakeholders can see how changes in current assets and liabilities affect cash flow, providing insight into the company's operational efficiency and liquidity.

This method effectively highlights the impact of working capital decisions on cash generation, which is critical for stakeholders who want to evaluate the company’s short-term financial health and operational efficiency. For example, an increase in accounts receivable might indicate that the company is selling more but may face cash shortages if those sales are not quickly converted to cash. Thus, the indirect method is valuable for revealing how well management handles the day-to-day operations of the company, including inventory management and credit control.