This website uses cookies to ensure you have the best experience. Learn more

Operating Activities Of Cash Flow Statement Under Indirect Method

1147 words - 5 pages

Cash flow from operating activities under indirect method: Cash flows from operations are generated from the organization’s normal activities. These cash flows are generally routine and recurring. They are particularly important because most organizations must be capable of generating positive cash flows from operations over the long run to remain viable. It deals with the cash generated or used by the entity’s primary activities. The cash flow statement reports past cash flows, but the same or similar activities and cash flows can be expected to occur in the future. In this section under indirect method company start with accrual-basis net income and adjust that figure to obtain the cash ...view middle of the document...

The depreciation expense recognized during a period is not a cash expense; it does not result in a decrease in the cash balance. Cash was reduced initially when the asset was first acquired. The expense is simply an accountant’s allocation of a cost incurred previously. Therefore, while income for the period is decreased by the amount of the depreciation expense, cash is not. The difference in timing between the cash outflow for the purchase of a fixed asset and the related income effects can be shown as follows:

Noncash effect on income
-------------------------------------------------depreciation expense------------------------------------------

Passage of time

Purchase of Asset End of asset life

Cash outflow for
Purchase of equipment

If we are interested in the amount of cash generated by a company’s operations, then we need to add back the amount of depreciation expense to the company’s net income. In other words, if all other revenues and expenses were cash items, net income would understate cash generated by the amount of the depreciation expense.

Amortization of debt discount:
When interest expense has been increased by the amortization of bond discount, an amount must be added to net income in the cash flow statement to determine the amount of cash generated from operations. The reason is that a portion of the discount is charged to interest expense each period under accrual accounting. However, the amount of discount expensed each period represents a noncash charge against income.

Gains and losses:
Companies often include in their income statements gains and losses that are not directly related to their regular operations. For example, companies often report gains and losses from disposing of investments or fixed assets, and from retiring debt. Because these gains and losses are not related to regular operations, they must be eliminated from the operating section of the cash flow statement. Gains must be deducted from net income in the operating section of the cash flow statement to arrive at cash generated from operations, and losses must be added back. The cash effects of the transactions giving rise to the gains and losses are reported in the investing or financing sections of the cash flow...

Other Essays Like Operating Activities of Cash Flow Statement Under Indirect Method

Peanut oil press users to share the truth about your operating principle of it under your

520 words - 3 pages press it . Whether it is in the process of using peanut oil press or just those peanut oil press in the course of good, there are a lot of different operations. Peanut oil press equipment in the actual use of the process, we first have to do is read the instructions carefully, and then wait until we are familiar with the mechanical performance characteristics and method of operation, go to the appropriate action. In addition, before we turned

Harmonization of Ifrs (Aasb 107) Essay

1524 words - 7 pages be the ‘green light’ for using indirect method in preparing cash flow statement. There are many arguments in support of indirect method for it essentially presents non-cash transactions that are included in net-income calculation and then reconcile the net income to cash from operating activities (Way, 2013). By using such method, it enables users to better understand the different linkages among financial statements. For instance, the increase

blasted hopes

5497 words - 22 pages , producing negative cash flows from financing. John Stacey: I am beginning to see why you said that the statement of cash flows is so useful. Where do you start your review and analysis? Lucille Barnes: A way to approach the cash-flow statement is to begin with cash flows from operating activities. If this is the cash-flow engine, then the first question is, Is cash flow from operating activities greater, or less, than zero? Also of interest

Case 11-1: Polluter Corp

2715 words - 11 pages Alternative 1 argue the Company should present the gain as a reconciling item in arriving at operating cash flows from net income under the indirect method as described in ASC 230-10-45-28. Proponents of Alternative 1 believe this presentation is consistent with the form and content requirements of ASC 230. ASC 203-10-45-2 states: A reconciliation of net income and net cash flow from operating activities, which generally provides information

Accounting Final Exam Study Guide

3659 words - 15 pages receipts and gross payments. * Indirect method – presents the operating activities section of the cash flow statement by adjusting net income to compute cash flows from operating activities. * Net cash flows provided by (used in) operating activities is always the same under the direct and indirect methods. * Determining Operating Cash Flows Using the Indirect Method * Net income * Start with net income as reported on

Chapter 13 Solution

1562 words - 7 pages from customers 350,000 Expenses paid 30,000 Computer equipment purchase 30,000 Interest paid 1,000 Payments to suppliers 200,000 Income taxes paid 4,000 Beginning cash balance 10,000 Prepare a statement of cash flows using the direct method. Solution Statement of Cash Flows Cash flows from operating activities Receipts from customers 350 000  Payments to suppliers and employees (330 000) Interest Received 2 000


3860 words - 16 pages from operating activities. Preparation of the Statement of Cash Flows – Indirect Method Step 1: Operating Activities Determine net cash provided/used by operating activities by converting net income from accrual basis to cash basis. Common adjustments to Net Income (Loss): * Add back noncash expenses (depreciation, amortization, or depletion expense). * Deduct gains and add losses. Changes Expense Although depreciation

Kpmg Accounting For Lease Extension

1872 words - 8 pages investment in a limited partnership interest under the equity method of accounting. The partnership had operating losses during the year, but a positive cash flow allowed the partnership to distribute funds to its investors. Would receipt of that distribution by the entity be classified on the statement of cash flows as cash inflows from investing activities or as cash inflows from operating activities? Reply —FASB Statement No. 95, Statement of

Week One Discussion

2302 words - 10 pages , it is not affected by the method the company chooses to spread the capital costs over the assets’ useful life. However, EBITDA, though Also known as … EBITDA is also known as operating income before depreciation and amortization, or OIBDA. 1 useful in some applications, is does not fully reflect the cash flows of a company. The requirement that companies report cash flow information in the statement of cash flows provides


2271 words - 10 pages financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes. The cash flow statement is intended to 1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances 2. provide additional information for evaluating changes in assets, liabilities and equity 3. improve the comparability of different

Cash Flow Analsyis

1175 words - 5 pages Operating Activities PnP reports cash flow from operating activities using the direct method, whereby major classes of gross cash receipts and gross payments are disclosed. There has been an increase in the year 2012 in regards to cash flow from operating activities. The increase of net cash from R17.4 to R1228.8 mil indicates that there is more economic inflow even though profits have decreased from R784.4 in to 2011 to R681.4 in 2012 as

Related Papers

Cash Flow Statement Essay

2973 words - 12 pages results in a more easily understood report.[12] The indirect method is almost universally used, because FAS 95 requires a supplementary report similar to the indirect method if a company chooses to use the direct method. [edit] Direct method The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing

Statement Of Cash Flows Essay

727 words - 3 pages activities. Under IFRS the entity is given the option to prepare statement of cash flows using either the direct or indirect method. The direct method is the preferred method but is not mandatory. Entities are not required to provide schedule of reconciliation between net income and net cash flows from operating activities if direct method is used. Under U.S. GAAP entities are also allowed to use either the direct or indirect method, however they are

Statement Of Cash Flows Essay

1658 words - 7 pages shareholders (Rothbort, 09/07). Two different ways are used to prepare the statement of cash flows. The direct method starts with the total income and subtracts any cash activities to determine the ending cash balance. The indirect method starts with the net income and adds or subtracts anything not a cash activity. The statement of cash flows consists of three parts. The first part is the operating activity section. Any transactions not

Solution Case 3 1 Cash Flow Analysis – Orthodontic Centers Of America

1057 words - 5 pages the contract is signed. 4. The trends of cash from operations, cash for investing, free cash flows, and cash from financing: Free Cash Flow used here is FCF to Equity   | 2000 | 1999 | 1998 | Cash Flow from Operating activities | 39.644.000 | 23.347.000 | 22.109.000 | Less: Net Investment in Fixed Capital | (20.271.000) | (22.520.000) | (17.638.000) | Less: Debt