Cash flow statement

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Sharad Saini

Student

286 Points Posted on 10 September 2010

hiiiii

I have a doubts in relation to cash flow stmt

Fixed Assets purchase Rs 1 Lac payment by the end of year Rs 90000 balance is Rs10000 which is included in creditors. Now when u r preparing cash flow stmt by Indirect Method how should u present it

Alt 1: Purchase of assets (Investing Activity) Rs 1 Lac and when u will adjust working capital items then this 10000 shall also be adjusted and balance will match.

Alt 2 : Purchase of assets Rs 90000 and while adjusting working capital items adjust creditors excluding these 10000

which is moreappropriate????

Plz advice.............

Replies (5)

Karan Bhatia

Student

43 Points Posted on 10 September 2010

Option 1 is appropriate because that will result in net cash outflow of Rs. 90,000.

Sharad Saini

Student

286 Points Posted on 11 September 2010

but net outflow in both the cases will be Rs90000........

Manoj BG

Tax Professional and in Service

1795 Points Posted on 11 September 2010

HI SHARAD,

OPTION 2 IS MOST APPROPRIATE. SINCE UNDER THIS OPTION, WE CAN SHOW THE ACTUAL CASH OUTFLOW FOR PURCHASE OF FIXE ASSET RS.90,000. REMAINING RS 10,000 IS JUST LIKE AS CREDIT PERIOD ALLOWED FOR PAYMENT OF FIXED ASSET AND SHOULD NOT BE INCLUDED IN SUNDRY CREDITORS. SINCE UNDER INDIRECT METHOD, ADJUSTMEMT OF CREDITORS REQUIRED IN ORDER TO GET THE CASH FLOW FROM OPERATING ACTIVITIES. THUS, IF WE INCLUDE IN SUCH CREDITORS PORTION OF PAYABLE ATTIBUTABLE TO FIXED ASSET AND NOT TO WORKING CAPITAL, IT WILL NOT GIVE CORRECT CASH FLOW FROM OPERATING ACTIVITIES.

THUS, 2ND ALTERNATIVE IS MOST APPROPRIATE.

REGARDS,

MANOJ

Faiz Ahmed

Article Trainee

1731 Points Posted on 12 September 2010

Originally posted by : Manoj B. Gavali
	HI SHARAD, OPTION 2 IS MOST APPROPRIATE. SINCE UNDER THIS OPTION, WE CAN SHOW THE ACTUAL CASH OUTFLOW FOR PURCHASE OF FIXE ASSET RS.90,000. REMAINING RS 10,000 IS JUST LIKE AS CREDIT PERIOD ALLOWED FOR PAYMENT OF FIXED ASSET AND SHOULD NOT BE INCLUDED IN SUNDRY CREDITORS. SINCE UNDER INDIRECT METHOD, ADJUSTMEMT OF CREDITORS REQUIRED IN ORDER TO GET THE CASH FLOW FROM OPERATING ACTIVITIES. THUS, IF WE INCLUDE IN SUCH CREDITORS PORTION OF PAYABLE ATTIBUTABLE TO FIXED ASSET AND NOT TO WORKING CAPITAL, IT WILL NOT GIVE CORRECT CASH FLOW FROM OPERATING ACTIVITIES. THUS, 2ND ALTERNATIVE IS MOST APPROPRIATE. REGARDS, MANOJ