What’s the difference between Direct and Indirect method.
Why increase in debtors are subtracted.
Why increase in creditors are added.
Why decrease in Inventory is added.
Gaurav Singh
(student)
(496 Points)
Replied 28 October 2011
See,In direct method. you add your inflow and subtract ur otflow.In indirect method,net profit before taxation is taken and back calculations are done.Increase in asset increases the profit but they don't result in cash inflow,likewise increase in liabilities decrease the profit but don't result in cash outflow.,so former is deducted and later is added.
May this help you...
shyam
(CA Final Student)
(166 Points)
Replied 29 October 2011
Just find that due to which item cash is incoming and due to which cash is out going.
e.g. You asked why decrease in inventory is added?
Just think that when you sale the inventory then cash will come so it amounts to cash in flow thats why it is added back.
in the same way analyse all the items. hope it will help you.
Bhaskar Unnikrishnan CPA CMA
(Accounts / Administration)
(414 Points)
Replied 29 October 2011
A similar discussion can be found in below link with some examples: it may help you!
Prashanth
(Chartered Accountant)
(2322 Points)
Replied 30 October 2011
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Agreedf Originally posted by : gaurav Pushkar |
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See,In direct method. you add your inflow and subtract ur otflow.In indirect method,net profit before taxation is taken and back calculations are done.Increase in asset increases the profit but they don't result in cash inflow,likewise increase in liabilities decrease the profit but don't result in cash outflow.,so former is deducted and later is added. May this help you... |
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Devang Gajjar
(Chartered Accountant)
(41 Points)
Replied 01 November 2011
First of all, all comments from above persons are right.
Secondly,
Consider the rule Debit what comes in & Credit what goes out.............
As you said that increase in debtors are substracted because if debtors increase it means that we have not received cash from sales which shows that incoming of cashflow is stopped..... So we deduct it.....
Simillarly, it will be same for creditors and inventories......
Regards,
Devang Gajjar
C.A. Final Student
Barun Nandi
(CWA)
(35 Points)
Replied 01 November 2011
(i)Our AS 3 only permit preparation of cash flow in indirect method.
(ii) The direct method and indirect method are only relating to calculation of cash flow from operatin activities. And the remaning parts i.e. cash flow from financial activities and cash flow from investing activities both are same under direct and indirect method.
(iii) cash flow from operating activities under direct method can be calculated as under
cash received from customer ***
(-) cash paid to supplier & employees ***
cash generated from operation ***
(-) income tax paid ***
cash flow before extra ordinary activities ****
(-) extra ordinary activity ***
net cash flow from operating activities *******
increase in debtors- cash out flow
increase in creditors - cash inflow
decrease in inventory- cash inflow
Hemanth Sai
(CA-FINAL,AUDIT TRAINEE)
(110 Points)
Replied 02 November 2011
its just like a recouncilation between opening cash balance and closing cash balance with segment wise i.e., operational,investing&financing.
so wee need to reverse the increase and decrease in the currebt assets anbd liabilities.
binu mondal
(accountant)
(22 Points)
Replied 06 February 2012
thanks
binu
C.A SUVAJIT SAHU
(CA ( In Practice ))
(708 Points)
Replied 06 February 2012
For cash flow statements the best book is " PC TULSIAN ( ACCOUNTS ) ".
follow this book .....for concept &clarity.
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