Cash flow indirect method - a different approach


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)

Menu

Cash flow indirect method - a different approach

Rahul Nandwani

Rahul Nandwani

Leave a Reply

Recent Threads

Related Threads

Menu

Forum Search

Cash flow indirect method - a different approach

Rahul Nandwani

Rahul Nandwani

Leave a Reply

Recent Threads

Related Threads