Cash from Operation under Indirect Method

Determination of Cash from Operating Activities under Indirect Method

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:

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

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

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