1 | Indirect Method (Sample Format) | ||||
Net Income Before Tax | |||||
Add:Depreciation | |||||
Other Non Cash (Like Forex Fluctuation) | |||||
Interest Expense (shown under Financing) | |||||
Loss on Sale of Fixed Assets/Long Term Investment | |||||
Less: Interest/Dividend/Rent Income | |||||
Profit on sale of Fixed Assets/Long Term Investment | |||||
Interest Income (incl TDS and shown under Investing) | |||||
Any Non cash income (Like Forex Fluctuation) | |||||
Funds From Operations | |||||
Add:(Increase)/Decrease in Current Assets(excl Cash and Cash Equivalents) | |||||
Add:Increase/(Decrease) in Current Liabilities(excl cash and cash equivalents) | |||||
CFO(before tax) | |||||
Less:Tax Paid(SA + TDS + Advance for the relevant AY) | |||||
CFO | |||||
Cash from Investing | |||||
Sale of Long Term Investment/Fixed Asset | |||||
(Purchase of Long Term Investment/Fixed Asset) | |||||
Interest/Dividend/Rent Income (incl TDS) | |||||
Repayment of Loans/(Loans Given) | |||||
Cash From Financing | |||||
Sale / (Purchase/Buyback) of Equity/Debt/Pref Shares | |||||
(Dividend Paid/Interest Expense) | |||||
2 | The question arises why we add Decrease of CA and subtract increase in CA | ||||
while we add Increase of CL and subtract decrease in CL | |||||
One justification given by authors is that see if Drs increase by say 500 we did not received 500 over the Gross sales made to drs during the year. | |||||
This logic is valid but fails to justify everything | |||||
Say TDS or VAT input or Cenvat Credit or Inventories | |||||
Whether should we add increase or subtract it? | |||||
One would answer subtract as we do that for other CA | |||||
But the logic lies in the Fundamental Accounting assumption or equation which is | |||||
Equity = Assets - Liabilities | |||||
How is this relevant to cash flow lets see | Take this opening Balance sheet | ||||
Opening B/S | |||||
Equity | Assets(other than Cash and Cash Equivalents) | ||||
Liabilities | Cash and Cash Equivalents | ||||
Take this closing Balance sheet | |||||
Closing B/S | |||||
Equity | Assets(other than Cash and Cash Equivalents) | ||||
Liabilities | Cash and Cash Equivalents | ||||
Subtracting Closing B/S from opening B/S | |||||
Closing - Opening B/S | |||||
Equity (Clg - Opn) | Assets(other than Cash and Cash Equivalents) (Clg - Opn) | ||||
Liabilities (Clg - Opn) | Cash and Cash Equivalents (Clg - Opn) | ||||
Taking Assets on the liabilities side since it is taken on the cr side The signs of Clg- Opn would be written as Opn - Clg | |||||
Closing - Opening B/S | |||||
Equity (Clg - Opn) | |||||
Liabilities (Clg - Opn) | Cash and Cash Equivalents (Clg - Opn) | ||||
Assets(other than Cash and Cash Equivalents) (Opn - Clg) | |||||
Hence when we take increase of CA we Add decrease and subract increase as equation of opn - clg of CA yield positive when there is decrease and negative when it increases | |||||
So the Above Closing - Opening Is the actual cash flow but that does not help the user in a more meaningful way | |||||
Thererfore we show a reco from Net income to Cash flow and show diff activities such as Operating , Investing and Financing | |||||
Take the above sample with comments | |||||
Indirect Method (Sample Format) | |||||
Net Income Before Tax | Since we started with NPBT we have to take care and consider Sale/Purchase of Equit Debt Pref and Dividend and Interest paid seperately | ||||
Add:Depreciation | Added back therefore we cannot use increase in FA now as Depre effect has been nullified | ||||
Other Non Cash (Like Forex Fluctuation) | As it is non cash | ||||
Interest Expense (shown under Financing) | Shown under separate head | ||||
Loss on Sale of Fixed Assets/Long Term Investment | Therefore again we cannot consider opn - clg as we nullified profit/loss to show actual invest in FA/Invt/Loans | ||||
Less: Interest/Dividend/Rent Income | |||||
Profit on sale of Fixed Assets/Long Term Investment | Therefore again we cannot consider opn - clg as we nullified profit/loss to show actual invest in FA/Invt/Loans | ||||
Interest Income (incl TDS and shown under Investing) | Shown under separate head | ||||
Any Non cash income (Like Forex Fluctuation) | As it is non cash | ||||
Funds From Operations | |||||
Add:(Increase)/Decrease in Current Assets(excl Cash and Cash Equivalents) | Because of working above | ||||
Add:Increase/(Decrease) in Current Liabilities(excl cash and cash equivalents) | Because of working above.Do not consider Tax provision as our base was NPBT | ||||
CFO(before tax) | |||||
Less:Tax Paid(SA + TDS + Advance for the relevant AY) | tax paid as we started with NPBT | ||||
CFO | |||||
Cash from Investing | |||||
Sale of Long Term Investment/Fixed Asset | Actual cash received or paid | ||||
(Purchase of Long Term Investment/Fixed Asset) | |||||
Interest/Dividend/Rent Income (incl TDS) | |||||
Repayment of Loans/(Loans Given) | |||||
Cash From Financing | |||||
Sale / (Purchase/Buyback) of Equity/Debt/Pref Shares | As we started with NPBT | ||||
(Dividend Paid/Interest Expense) | As we started with NPBT | ||||
Additional Points | |||||
Consider Drs. | Drs | ||||
Amt | Amt | ||||
Opn | TDS | ||||
BD recovery | Bad Debts | ||||
Sales | Cash | ||||
Clg | |||||
We conider Opn - Clg | |||||
Drs | |||||
Amt | Amt | ||||
Opn - Clg | TDS | ||||
Bad Debts | |||||
Cash | |||||
(BD recovery) | |||||
(Sales) | |||||
i.e All Crs - All Drs(of course excluding balancing figures) would be the general rule for CA | |||||
therefore every debit will have a cr and cr will have a dr | |||||
Consider | |||||
Sale | Dr Debtors | Cr | P/L | ||
Here sale is written in negative(As shown above) which will offset cr in PL of Sales | |||||
Bad Debts | Cr drs | Dr | P/L | ||
here cr is in positive which will offset Dr in P/L | |||||
TDS | Cr Drs | Dr | TDS Receivable | ||
Asset - asset effect is offset | |||||
Bd recovery | Dr Drs | Cr | P/l | ||
here dr is written in negative which will offset the cr in p/l | |||||
for Crs | |||||
It will be All Crs - All Drs | |||||
and one could analyse the second effects same as drs. | |||||
For FA/Invst/Loans one could have directly considered increase decrease like drs but it is not that helpful for the users .(dr cr effects would have offset each other) |
Cash flow indirect method - a different approach
Rahul Nandwani (. ) (25 Points)
10 October 2016