Cash Flow Statement under Direct and Indirect method
Subject: Principles of Accounting
Overview
After the determination of cash flows from the operating activities, investing activities and financing activities, their results are calculated and added to ascertain the net change on cash and cash equivalents. If given net profit or any other irrelevant information but sales and other revenues are missing, in such case, cash flow statement is prepared under indirect method.Cash Flow Statement under Direct and Indirect method
Cash Flow Statement under Direct Method
Cash flow statement is prepared by combining all the cash flows i.e. cash flows from operating activities, investing activities and financing activities. Below is the format for the cash flow statement under Direct method:
| Particulars | Rs. | Rs. |
| Cash flow from operating activities: a.Cash collection from customers: Net sales Decrease in bills receivable Decrease in accounts receivable Decrease in sundry debtors Bad debt recovered Increase in provision for doubtful debt Increase in provision for discount on debtors Discount allowed Increase in bills receivable Increase in accounts receivable Increase in sundry debtors Decrease in provision for doubtful debt Decrease in provision for discount on debtors | xxx xxx xxx xxx xxx xxx xxx (xxx) (xxx) (xxx) (xxx) (xxx) (xxx) | xxx |
| b.Cash paid to suppliers for purchase of merchandise: Cost of goods sold (opening stock + purchases – closing stock) Decrease in bills payable Decrease in accounts payable Decrease in sundry creditors Increase in inventory Increase in sundry creditors Decrease in inventory Increase in accounts payable Increase in bills payable Discount received | (xxx) (xxx) (xxx) (xxx) (xxx) xxx xxx xxx xxx xxx | (xxx) |
| c.Cash paid to employees and for other expenses: Cash operating expenses including wages (item wise) Increase in outstanding (o/s) expenses Decrease in o/s expenses Decrease in prepaid expenses Increase in prepaid expenses | (xxx) xxx (xxx) xxx (xxx) | (xxx) |
| d.Interest paid: Interest expense (as per income statement) Increase in prepaid interest Decrease in prepaid interest Decrease in o/s interest Increase in o/s interest | (xxx) (xxx) xxx (xxx) xxx | (xxx) |
| e.Tax paid: Tax expense (as per income statement) Increase in prepaid tax Decrease in prepaid tax Decrease in o/s tax or provision for taxation Increase in o/s tax or provision for taxation | (xxx) (xxx) xxx (xxx) xxx | (xxx) |
| f.Interest and dividend received: Interest received (as per income statement) Dividend received (as per income statement) Decrease in interest/ dividend receivable Increase in interest/ dividend receivable | xxx xxx xxx (xxx) | xxx |
| g.Cash from operation before extra ordinary items (a+b+c+d+e+f) | xxx | |
| h.Cash from extra ordinary items: Increase in short term borrowings, bank overdraft, etc. Decrease in short-term borrowings, bank overdraft, etc. | xxx (xxx) | xxx/(xxx) |
| Net cash flow from operating activities [A] | xxx/(xxx) | |
| Cash flow from investing activities: Purchase of fixed assets Additional investment Sales of fixed assets Sales of investment Long term loan given Loan repayment received Interest / dividend received from investment | (xxx) (xxx) xxx xxx (xxx) xxx xxx | |
| Net cash flows from (used by) investing activities [B] | xx/(xx) | |
| Cash flow from financing activities: Issue of shares at par or at premium or at discount Increase in loan & debenture at par/ premium/ discount Red. of pref. shares & deb. at par/ premium/ discount Payment of interim dividend (if any) Payment of dividend (last year’s provision of dividend) | xxx xxx (xxx) (xxx) (xxx) | |
| Net cash flows from (used by) financing activities [C] | xxx/(xxx) | |
| Net changes in cash & cash equivalents [A+B+C] Add:Beginning cash & cash equivalent | xxx/(xxx) xxx | |
| Ending cash & cash equivalent | xxx/(xxx) |
Alternatively,
Cash flow statement under direct method
| Particulars | Rs. | Rs. |
| Cash collection from customers: Net sales Add: Sundry debtors of last year Bills receivable of last year Accounts receivable of last year Provision for doubtful debt of current year Provision for discount on debtors of current year Bad debt recovered | xxx xxx xxx xxx xxx xxx | xxx xxx |
| Less: Sundry debtors of current year Bills receivable of current year Accounts receivable of current year Provision for doubtful debt of last year Provision for discount on debtors of last year Discount allowed | xxx xxx xxx xxx xxx xxx | xxx xxx |
| Cash collection from customers (a) | xxx | |
| Cash paid to suppliers: Cost of goods sold (opening stock + purchases – closing stock) Add: Sundry creditors of last year Bills payable of last year Accounts payable of last year Inventory of current year | xxx xxx xxx xxx | xxx xxx |
| Less: Sundry creditors of current year Bills payable of current year Accounts payable of current year Inventory of last year Discount received | xxx xxx xxx xxx xxx | xxx xxx |
| Cash paid to suppliers (b) | xxx | |
| Cash paid to employees and for other expenses: Operating expenses (item wise) Add: Prepaid expenses of current year Outstanding expenses of last year | xxx xxx | xxx xxx |
| Less: Prepaid expenses of last year Outstanding expenses of current year | xxx xxx | xxx xxx |
| Cash paid to employees and for other expenses (c) | xxx | |
| Interest paid: Interest expense (as per income statement) Add: Prepaid interest of current year Outstanding interest of last year | xxx xxx | xxx xxx |
| Less: Prepaid interest of last year Outstanding interest of current year | xxx xxx | xxx xxx |
| Interest paid (d) | xxx | |
| Tax paid: Tax expense (as per income statement) Add: Prepaid tax of current year Outstanding tax or provision for tax of last year | xxx xxx | xxx xxx |
| Less: Prepaid tax of last year Outstanding tax or provision for tax of current year | xxx xxx | xxx xxx |
| Tax paid (e) | xxx | |
| Interest and dividend received: Interest received (as per income statement) Dividend received (as per income statement) Add: Interest/ Dividend receivable of last year | xxx | xxx xxx xxx |
| Less: Interest/ Dividend receivable of current year | xxx | xxx xxx |
| Interest and dividend received (f) | xxx | |
| Cash from operation before extra ordinary items (a-b-c-d-e+f) | xxx | |
| Cash from extra ordinary items: Add: Increase in bank loan, bank overdraft, etc. Less: Decrease in bank loan, bank overdraft, etc. | xxx (xxx) | xxx/(xxx) |
| Net Cash Flows from Operating Activities [A] | xxx/(xxx) | |
| Cash flow from investing activities: Purchase of fixed assets Additional investment Sales of fixed assets Sales of investment Long term loan given Loan repayment received Interest/ dividend received from investment | (xxx) (xxx) xxx xxx (xxx) xxx xxx | |
| Net cash flows from (used by) investing activities [B] | xxx/(xxx) | |
| Cash flow from financing activities: Issue of shares at par or at premium or at discount Increase in loan & debenture at par/ premium/ discount Red. of pref. shares & deb. at par/ premium/ discount Payment of interim dividend (if any) Payment of dividend (last year’s provision of dividend) | xxx xxx (xxx) (xxx) (xxx) | |
| Net cash flows from (used by) financing activities [C] | xxx/(xxx) | |
| Net changes in cash & cash equivalents [A+B+C] Add:Beginning cash & cash equivalent | xxx/(xxx) xxx | |
| Ending cash & cash equivalent | xxx/(xxx) |
Cash Flow Statement Under Indirect Method
| Particulars | Rs. | Rs. |
| Cash flow from operating activities: Net income after tax and dividend Add: Non-operating / non-cash expenses & losses Depreciation for the year Loss on sales of fixed assets Fictitious/ intangible assets written off Othernon operating/non cash expenses & losses | xxx xxx xxx xxx xxx | xxx xxx |
| Less:Non operating incomes Dividend/ interest received Gain on sales of fixed assets Other non-operating incomes | xxx xxx xxx | xxx xxx |
| Funds from operation Add: Decrease in current assets (except cash & bank) Increase in current liabilities | xxx xxx | xxx xxx |
| Less: Increase in current assets (except cash & bank) Decrease in current liabilities | xxx xxx | xxx xxx |
| Less: Tax paid | xxx | xxx xxx |
| Net Cash flow from operating activities [A] | xxx | |
| Cash flow from investing activities: Purchase of fixed assets & long term investment Sales of fixed assets & long term investment | (xxx) xxx | |
| Net cash flows from (used by) investing activities [B] | xxx/(xxx) | |
| Cash flow from financing activities: Increase in share capital & long term debt Increase in share premium Payment of loan Dividend paid Redemption of preference share & debentures | xxx xxx (xxx) (xxx) (xxx) | |
| Net cash flows from (used by) financing activities [C] | xxx/(xxx) | |
| Net changes in cash & cash equivalents [A+B+C] Add:Beginning cash & cash equivalent | xxx/(xxx) xxx | |
| Ending cash & cash equivalent | xxx/(xxx) |
Notes:
- If sales, operating expenses and changes in current assets and liabilities are provided, cash flow statement is prepared under direct method.
- If net profit or any other irrelevant information is given but sales and other revenues are missing, in such case, cash flow statement is prepared under indirect method.
Determination of Net change on Cash and Cash Equivalents:
It is the final step in the preparation of cash flow statement. After the determination of cash flows from the operating activities, investing activities and financing activities, their results are calculated and added to ascertain the net change in cash and cash equivalents.
After the estimation of net changes in cash and cash equivalents, the opening balance of cash and cash equivalents is added to it which gives the ultimate result of the ending balance of cash and cash equivalent.
References:
Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu
Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu
Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu
Things to remember
- If sales, operating expenses and changes in current assets and liabilities are provided, cash flow statement is prepared under direct method.
- If given net profit or any other irrelevant information but sales and other revenues are missing, in such case, cash flow statement is prepared under indirect method.
- It includes every relationship which established among the people.
- There can be more than one community in a society. Community smaller than society.
- It is a network of social relationships which cannot see or touched.
- common interests and common objectives are not necessary for society.
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