Note on Cash Flow Statement under Direct and Indirect method

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Cash Flow Statement under Direct Method

Cash flow statement is prepared by combining all the cash flows i.e. cash flows from operating activities, investing activities and financing activities. Below is the format for the cash flow statement under Direct method:

Particulars

Rs.

Rs.

Cash flow from operating activities:

a.Cash collection from customers:

Net sales

Decrease in bills receivable

Decrease in accounts receivable

Decrease in sundry debtors

Bad debt recovered

Increase in provision for doubtful debt

Increase in provision for discount on debtors

Discount allowed

Increase in bills receivable

Increase in accounts receivable

Increase in sundry debtors

Decrease in provision for doubtful debt

Decrease in provision for discount on debtors

xxx

xxx

xxx

xxx

xxx

xxx

xxx

(xxx)

(xxx)

(xxx)

(xxx)

(xxx)

(xxx)

xxx

b.Cash paid to suppliers for purchase of merchandise:

Cost of goods sold (opening stock + purchases – closing stock)

Decrease in bills payable

Decrease in accounts payable

Decrease in sundry creditors

Increase in inventory

Increase in sundry creditors

Decrease in inventory

Increase in accounts payable

Increase in bills payable

Discount received

(xxx)

(xxx)

(xxx)

(xxx)

(xxx)

xxx

xxx

xxx

xxx

xxx

(xxx)

c.Cash paid to employees and for other expenses:

Cash operating expenses including wages (item wise)

Increase in outstanding (o/s) expenses

Decrease in o/s expenses

Decrease in prepaid expenses

Increase in prepaid expenses

(xxx)

xxx

(xxx)

xxx

(xxx)

(xxx)

d.Interest paid:

Interest expense (as per income statement)

Increase in prepaid interest

Decrease in prepaid interest

Decrease in o/s interest

Increase in o/s interest

(xxx)

(xxx)

xxx

(xxx)

xxx

(xxx)

e.Tax paid:

Tax expense (as per income statement)

Increase in prepaid tax

Decrease in prepaid tax

Decrease in o/s tax or provision for taxation

Increase in o/s tax or provision for taxation

(xxx)

(xxx)

xxx

(xxx)

xxx

(xxx)

f.Interest and dividend received:

Interest received (as per income statement)

Dividend received (as per income statement)

Decrease in interest/ dividend receivable

Increase in interest/ dividend receivable

xxx

xxx

xxx

(xxx)

xxx

g.Cash from operation before extra ordinary items (a+b+c+d+e+f)

xxx

h.Cash from extra ordinary items:

Increase in short term borrowings, bank overdraft, etc.

Decrease in short-term borrowings, bank overdraft, etc.

xxx

(xxx)

xxx/(xxx)

Net cash flow from operating activities [A]

xxx/(xxx)

Cash flow from investing activities:

Purchase of fixed assets

Additional investment

Sales of fixed assets

Sales of investment

Long term loan given

Loan repayment received

Interest / dividend received from investment

(xxx)

(xxx)

xxx

xxx

(xxx)

xxx

xxx

Net cash flows from (used by) investing activities [B]

xx/(xx)

Cash flow from financing activities:

Issue of shares at par or at premium or at discount

Increase in loan & debenture at par/ premium/ discount

Red. of pref. shares & deb. at par/ premium/ discount

Payment of interim dividend (if any)

Payment of dividend (last year’s provision of dividend)

xxx

xxx

(xxx)

(xxx)

(xxx)

Net cash flows from (used by) financing activities [C]

xxx/(xxx)

Net changes in cash & cash equivalents [A+B+C]

Add:Beginning cash & cash equivalent

xxx/(xxx)

xxx

Ending cash & cash equivalent

xxx/(xxx)

Alternatively,

Cash flow statement under direct method

Particulars

Rs.

Rs.

Cash collection from customers:

Net sales

Add:

Sundry debtors of last year

Bills receivable of last year

Accounts receivable of last year

Provision for doubtful debt of current year

Provision for discount on debtors of current year

Bad debt recovered

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Less:

Sundry debtors of current year

Bills receivable of current year

Accounts receivable of current year

Provision for doubtful debt of last year

Provision for discount on debtors of last year

Discount allowed

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Cash collection from customers (a)

xxx

Cash paid to suppliers:

Cost of goods sold (opening stock + purchases – closing stock)

Add:

Sundry creditors of last year

Bills payable of last year

Accounts payable of last year

Inventory of current year

xxx

xxx

xxx

xxx

xxx

xxx

Less:

Sundry creditors of current year

Bills payable of current year

Accounts payable of current year

Inventory of last year

Discount received

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Cash paid to suppliers (b)

xxx

Cash paid to employees and for other expenses:

Operating expenses (item wise)

Add:

Prepaid expenses of current year

Outstanding expenses of last year

xxx

xxx

xxx

xxx

Less:

Prepaid expenses of last year

Outstanding expenses of current year

xxx

xxx

xxx

xxx

Cash paid to employees and for other expenses (c)

xxx

Interest paid:

Interest expense (as per income statement)

Add:

Prepaid interest of current year

Outstanding interest of last year

xxx

xxx

xxx

xxx

Less:

Prepaid interest of last year

Outstanding interest of current year

xxx

xxx

xxx

xxx

Interest paid (d)

xxx

Tax paid:

Tax expense (as per income statement)

Add:

Prepaid tax of current year

Outstanding tax or provision for tax of last year

xxx

xxx

xxx

xxx

Less:

Prepaid tax of last year

Outstanding tax or provision for tax of current year

xxx

xxx

xxx

xxx

Tax paid (e)

xxx

Interest and dividend received:

Interest received (as per income statement)

Dividend received (as per income statement)

Add:

Interest/ Dividend receivable of last year

xxx

xxx

xxx

xxx

Less:

Interest/ Dividend receivable of current year

xxx

xxx

xxx

Interest and dividend received (f)

xxx

Cash from operation before extra ordinary items (a-b-c-d-e+f)

xxx

Cash from extra ordinary items:

Add: Increase in bank loan, bank overdraft, etc.

Less: Decrease in bank loan, bank overdraft, etc.

xxx

(xxx)

xxx/(xxx)

Net Cash Flows from Operating Activities [A]

xxx/(xxx)

Cash flow from investing activities:

Purchase of fixed assets

Additional investment

Sales of fixed assets

Sales of investment

Long term loan given

Loan repayment received

Interest/ dividend received from investment

(xxx)

(xxx)

xxx

xxx

(xxx)

xxx

xxx

Net cash flows from (used by) investing activities [B]

xxx/(xxx)

Cash flow from financing activities:

Issue of shares at par or at premium or at discount

Increase in loan & debenture at par/ premium/ discount

Red. of pref. shares & deb. at par/ premium/ discount

Payment of interim dividend (if any)

Payment of dividend (last year’s provision of dividend)

xxx

xxx

(xxx)

(xxx)

(xxx)

Net cash flows from (used by) financing activities [C]

xxx/(xxx)

Net changes in cash & cash equivalents [A+B+C]

Add:Beginning cash & cash equivalent

xxx/(xxx)

xxx

Ending cash & cash equivalent

xxx/(xxx)

Cash Flow Statement Under Indirect Method

Particulars

Rs.

Rs.

Cash flow from operating activities:

Net income after tax and dividend

Add: Non-operating / non-cash expenses & losses

Depreciation for the year
Provision for taxation and dividend

Loss on sales of fixed assets

Fictitious/ intangible assets written off

Othernon operating/non cash expenses & losses

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Less:Non operating incomes

Dividend/ interest received

Gain on sales of fixed assets

Other non-operating incomes

xxx

xxx

xxx

xxx

xxx

Funds from operation

Add: Decrease in current assets (except cash & bank)

Increase in current liabilities

xxx

xxx

xxx

xxx

Less: Increase in current assets (except cash & bank)

Decrease in current liabilities

xxx

xxx

xxx

xxx

Less: Tax paid

xxx

xxx

xxx

Net Cash flow from operating activities [A]

xxx

Cash flow from investing activities:

Purchase of fixed assets & long term investment

Sales of fixed assets & long term investment

(xxx)

xxx

Net cash flows from (used by) investing activities [B]

xxx/(xxx)

Cash flow from financing activities:

Increase in share capital & long term debt

Increase in share premium

Payment of loan

Dividend paid

Redemption of preference share & debentures

xxx

xxx

(xxx)

(xxx)

(xxx)

Net cash flows from (used by) financing activities [C]

xxx/(xxx)

Net changes in cash & cash equivalents [A+B+C]

Add:Beginning cash & cash equivalent

xxx/(xxx)

xxx

Ending cash & cash equivalent

xxx/(xxx)

Notes:

  • If sales, operating expenses and changes in current assets and liabilities are provided, cash flow statement is prepared under direct method.
  • If net profit or any other irrelevant information is given but sales and other revenues are missing, in such case, cash flow statement is prepared under indirect method.

Determination of Net change on Cash and Cash Equivalents:

It is the final step in the preparation of cash flow statement. After the determination of cash flows from the operating activities, investing activities and financing activities, their results are calculated and added to ascertain the net change in cash and cash equivalents.

After the estimation of net changes in cash and cash equivalents, the opening balance of cash and cash equivalents is added to it which gives the ultimate result of the ending balance of cash and cash equivalent.

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

  1. If sales, operating expenses and changes in current assets and liabilities are provided, cash flow statement is prepared under direct method.
  2. If given net profit or any other irrelevant information but sales and other revenues are missing, in such case, cash flow statement is prepared under indirect method.

 

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