Cash from Operation under Indirect Method
Subject: Principles of Accounting
Overview
Investing activities related dividend and interest received are deducted from net income to determine funds from operation. Dividend received and interest received can be both included under either operating activities or investing activities. In other words, investing activities explain the overall changes in cash position between 2 balance sheets which occur while buying or selling of non-current assets.Cash from Operation under Indirect Method
Determination of Cash from Operating Activities under Indirect Method
Cash flow from operating activities is determined on the basis of the following factors:
- Non-income or loss
- Non-operating gain and incomes
- Non-cash expenses and losses, non-operating expenses, amortizations, and losses
- Changes in current liabilities
- Changes in current assets (except cash & equivalents)
These items can also be presented as follows:
| Cash inflows (Add) | Cash outflows (Less) |
| Net income Non-cash expenses (Depreciation) Non-operating expenses and losses Decrease in current assets (except cash & cash equivalents) Increase in current liabilities Amortization of intangible assets | Non-operating incomes/ gain Dividend/ interest received Profit on sale of fixed assets Increase in current assets (except cash & cash equivalents) Decrease in current liabilities Other non operating income |
Format for Cash flow Operation Under Indirect Method
Working notes:
- In above format, dividend and interest received are assumed as cash flows from investing activities.
- Non-operating incomes like interest received, dividend received, etc. are treated either as cash flows from operating activities or cash flows from investing activities.
- Investing activities related dividend and interest received are deduced from net income to determine funds from operation. In case if they are not from investing activities, but from operating activities, they are not deducted.
Illustration:
| Particulars | 2071 | 2072 |
| Debtors Creditors Inventory Tax paid Bills receivable Bills payable Outstanding expenses | 15,000 6,000 12,000 5,000 7,000 4,000 2,000 | 22,000 7,000 15,000 - 9,000 3,000 3,000 |
Additional information:
Net profit for the year 2072 is Rs.7,000
Depreciation Rs. 3,000
Loss on sale of furniture is Rs. 1,000
Goodwill is Rs. 2,000
Required: Cash from operations under Indirect method.
Solution:
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
Determination of Cash Flow from Operating Activities under Indirect Method
- Non-income or loss
- Non-operating gain and incomes
- Non-cash expenses and losses, non-operating expenses, amortizations, and losses
- Changes in current liabilities
- Changes in current assets (except cash & equivalents)
- 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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