the way in which cash generated by operations is determined in the indirect method can lead to confusion about the nature of depreciation. hence, this calculation warrants further discussion. instead of calculating net cash flow from operations by showing cash inflows from customers and other revenue sources and then subtracting cash outflows for operating costs (the direct method), the starting point in the indirect method (as shown in illustration 11-3) was the net income figure, to which depreciation was added.this add-back of depreciation was done because depreciation was an expense in fairway's accrual-basis income statement that did not represent an outflow of cash during the period. (as was shown by the journal entry to record depreciation expense, depreciation was neither a source nor a use of cash.)