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Explain the Indirect Method for Calculating Cash Flow Statement

I want to explain the indirect method for calculating cash flow statement

Indirect method

Cash flow statement


 
A-cash flow from operating activity + B- Cash flow from investing activity + C- cash flow from financing activity + opening balance of cash book = Closing balance of cash book

A- category regarding cash flow from operating activity is different from direct method , other part is as same as direct method

 
According to indirect method when we calculate cash flow statement, we will care 8 points. The main aim is to calculate cash net profit or loss for operating activity like sale and purchase of goods. Now I am explaining all 8 points deeply

1st point

Taking the net profit as per profit and loss account. This is (+) item. This is the base for calculating cash net profit. Other 7 points are the just games of (+) and (-)

2nd point

Now we add all non cash and non operating expenses and losses in Ist point.
I want to tell you why we will (+) it in net profit. The answer is that because when we made of profit and loss account we had deducted these non cash and non operating expenses in our profit and loss account. Now our duty is to add them . Now I am telling about these expenses and losses
1) Depreciation
2) Preliminary expenses written off
3) Discount on issue of shares and deb. w/o
4) Goodwill written off
5) Patent and trade marks written off
6) Interest on borrowing and deb.
7) Loss on sale of fixed assets

One more question you can ask to me
Why non operating expenses are added in net profit?

Ans. Because it is true that these expenses in cash but we deems as cash outflow from financing activity or investing activity so there is no need to adjust in operation.

3rd Point

After adding 2nd point items , we must deduct 3rd point items. It means that all non cash or non operating income must be deducted from net profit for calculating cash net profit. In this , we can include
1) Dividend income (For non financial co.)
2) Rental income
3) Profit on sale of fixed asset

4th point

= Ist point + 2nd point – 3rd point

5th point
Now we add decrease in current assets because it must increase the cash inflow and also add increase in current liabilities
1) Decrease in stock
2) Decrease in debtors
3) Decrease in accrued income
4) Decrease in prepaid expenses
5) Increase in creditors
6) Increase in bill payables
7) increase in outstanding expenses
8) Increase in advance income
9) Increase in provision for doubtful debts

6th point
Increase in current assets and decrease in current liabilities must be deducted
1) Increase in stock
2) Increase in debtors
3) increase in accrued incomes
4) increase in prepaid expenses
5) decrease in creditors
6) Decrease in bill payables
7) decrease in outstanding expenses
8) decrease in advance incomes
9) Decrease in provision for d/d
General hint
· Increase in current assets means cash outflow so deduct
· Decrease in current liabilities is also cash outflow so deduct
· Decrease in current assets means cash inflow so add
· Increase in current liabilities is also cash inflow so add

7th point
Total cash flow from operating activity
= 4th point + 5th point – 6th point
8th point
Deduct income tax paid from 7th point
After this you can get net cash flow from operating activity
All other B and C category as same as first method.

COMMENTS

: 1
  1. should we not add outstanding expenses accounted during the year?

    ReplyDelete
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Accounting Education: Explain the Indirect Method for Calculating Cash Flow Statement
Explain the Indirect Method for Calculating Cash Flow Statement
Accounting Education
https://www.svtuition.org/2008/10/explain-indirect-method-for-calculating.html
https://www.svtuition.org/
https://www.svtuition.org/
https://www.svtuition.org/2008/10/explain-indirect-method-for-calculating.html
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