Cash from Operation under Indirect Method

Subject: Principles of Accounting

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Overview

Investing activities related dividend and interest received are deducted from net income to determine funds from operation. Dividend received and interest received can be both included under either operating activities or investing activities. In other words, investing activities explain the overall changes in cash position between 2 balance sheets which occur while buying or selling of non-current assets.
Cash from Operation under Indirect Method

Determination of Cash from Operating Activities under Indirect Method

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Source: www.slideshare.net

Cash flow from operating activities is determined on the basis of the following factors:

  • Non-income or loss
  • Non-operating gain and incomes
  • Non-cash expenses and losses, non-operating expenses, amortizations, and losses
  • Changes in current liabilities
  • Changes in current assets (except cash & equivalents)

These items can also be presented as follows:

Cash inflows (Add)

Cash outflows (Less)

Net income

Non-cash expenses (Depreciation)

Non-operating expenses and losses

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Decrease in current assets (except cash & cash equivalents)

Increase in current liabilities

Amortization of intangible assets

Non-operating incomes/ gain

Dividend/ interest received

Profit on sale of fixed assets

Increase in current assets (except cash & cash equivalents)

Decrease in current liabilities

Other non operating income

Format for Cash flow Operation Under Indirect Method

v

Working notes:

  • In above format, dividend and interest received are assumed as cash flows from investing activities.
  • Non-operating incomes like interest received, dividend received, etc. are treated either as cash flows from operating activities or cash flows from investing activities.
  • Investing activities related dividend and interest received are deduced from net income to determine funds from operation. In case if they are not from investing activities, but from operating activities, they are not deducted.

Illustration:

Particulars

2071

2072

Debtors

Creditors

Inventory

Tax paid

Bills receivable

Bills payable

Outstanding expenses

15,000

6,000

12,000

5,000

7,000

4,000

2,000

22,000

7,000

15,000

-

9,000

3,000

3,000

Additional information:

Net profit for the year 2072 is Rs.7,000
Depreciation Rs. 3,000
Loss on sale of furniture is Rs. 1,000
Goodwill is Rs. 2,000

Required: Cash from operations under Indirect method.

Solution:

c

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

Things to remember

 Determination of Cash  Flow from Operating Activities under Indirect Method

  1. Non-income or loss
  2. Non-operating gain and incomes
  3. Non-cash expenses and losses, non-operating expenses, amortizations, and losses
  4. Changes in current liabilities
  5. Changes in current assets (except cash & equivalents)
  • It includes every relationship which established among the people.
  • There can be more than one community in a society. Community smaller than society.
  • It is a network of social relationships which cannot see or touched.
  • common interests and common objectives are not necessary for society.

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