Question

Long Answer Question

Describe"Indirect" method of ascertaining Cash Flow from Operating Activities.

Answer 1

Indirect Method: This method starts with the Net Profit before tax and extraordinary items. For this purpose, the Net Profit as revealed by the Profit and Loss Account cannot be taken into consideration as there exists some items which do not leads to outflow of cash. The following are those items that need to be added back to the Net Profit of the Profit and Loss Account.

 

1. Non-cash items like, depreciation goodwill written off, etc are added to the Net Profit.
2. Non-operating expenses like loss on sale of fixed assets, transfers to reserves, loss on sale of fixed assets are added back to the Net Profit.
3. Provisions like, provisions for doubtful debts and discount for debtors, proposed dividends etc. should be added back to the Net Profit.
4. Decrease in current assets and increase in current liabilities should be added to the operating profit.

 

The following are those items that need to deduct from the Net Profit of the Profit and Loss Account.

1. Non-operating incomes like profit on sale of fixed assets, etc. are deducted from the Net Profit.
2. Non-trading Incomes like dividend received, interest received, tax refund, etc. are to be deducted from the Net Profit.
3. Increase in current assets and decrease in current liabilities should be deducted from the operating profit.

Indirect Method

Cash Flow Statement

Particulars			Amount Rs	Amount Rs
Cash Flow from Operating Activities:
Net Profit before tax and extraordinary items				***
	Add: Non-Cash Expenses and Non-Operating Expenses.
		Depreciation	**
		Goodwill	**
		Interest paid	**
		Loss on sale of fixed assets	**	**
	Less:	Non-Operating Incomes.
		Dividend received	**
		Profit on sale of fixed assets	**
		Interest received	**	**
Operating Profit before Working Capital Changes				***
	Add: Decrease in Current Assets		***
		Increase in Current Liabilities	**	***
	Less: Increase in Current Assets		***
		Decrease in Current Liabilities	***	***
Cash generated from Operating Activities				***
Less: Income tax paid				***
Cash flow before Extra ordinary items				***
	Add/Less: Extra ordinary items			***
Net Cash Flow from Operating Activities				***