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.
Determination of Cash from Operating Activities under Indirect Method
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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
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
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:
References:
Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu