5/25/2016

CashFlowStatementDirect&IndirectMethod

CHARTEREDCLUB

CashFlowStatementDirect&IndirectMethod

Cash Flow Statement also known as Statement of Cash Flows is a statement which shows the
Changes in the Cash Position of an organisation between 2 periods. Along with showing the
changes in the Cash Position of an organisation, it also depicts the reasons for such change
duringtheperiod.
ThemainreasonforthepreparationoftheCashFlowStatementisthattheIncomeStatementof
an enterprise is always prepared on an Accrual Basis and it may show profits in the Income
StatementbuttheCashreceivedoutoftheseprofitsmaybelowtorunthebusinessorviceversa.

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PREPARATIONOFCASHFLOWSTATEMENT
Cash Flows Statement is required to be prepared using InternationalAccounting Standard 7 (or
using the Accounting Standard 3 in India). While preparing the Cash Flow Statement, the cash
flowsduringtheperiodareclassifiedinto3majorcategories:
I.CashFlowfromOperatingActivities(DirectMethod/IndirectMethod)
II.CashFlowfromInvestingActivities
III.CashFlowfromFinancingActivities
Classification by activities provides information that allows users to assess the impact of those
activities on the financial position of the enterprise.This information also helps in evaluating the
interrelationshipsbetweentheseactivities.

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CashFlowsfromOperatingActivities
CashFlowsfrom operatingActivities are primarily derived from the PrincipalRevenueproducing
activitiesoftheenterprise.

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Thereare2methodsofpreparingtheCashFlowsfromOperatingActivities:
1.DirectMethod
2.IndirectMethod

1.CashFlowfromOperatingActivityDirectMethod
While preparing the Cash Flow Statement as per Direct Method, Actual Cash Receipts from
Operating Revenues and Actual Cash Payments for Operating Activities are arranged and
presented in the Cash Flow Statement. The difference between Cash Receipts and Cash
PaymentsistheNetCashFlowfromOperatingActivitiesundertheDirectMethod.Inotherwords,
itisaIncomeStatement(Profit&LossA/c)preparedonCashBasisundertheDirectMethod.

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While preparing the Cash Flow Statement as per Direct Method, items like Depreciation,
AmortisationofIntangibleAssets,PreliminaryExpenses,DebentureDiscountetcareignoredfrom
Cash Flow Statement since the Direct Method includes only Cash Transactions and NonCash
Transactionsareomitted.
Likewise,noadjustmentismadeforLoss/GainontheSaleofFixedAssetsandInvestmentswhile
preparingtheCashFlowStatementaspertheDirectMethod.
FormatforComputationofCashFlowsfromOperatingActivitiesasperDirectMethod
Particulars
CashReceiptsfromCustomers

Amount
xxx

CashPaidtosuppliersandemployees
CashgeneratedfromOperations

(xxx)
xxx

IncomeTaxPaid

(xxx)

CashFlowbeforeExtraordinaryItems

xxx

Extraordinaryitems

xxx

NetCashfromOperatingActivities(DirectMethod)

xxx

2. Cash Flow from Operating Activity Indirect

Method
WhilepreparingtheCashFlowStatementaspertheIndirectMethod,theNetProfit/Lossforthe
period is used as the base and then adjustments are made for items that affected the Income
StatementbutdidnotaffecttheCash
While preparing the Cash Flow Statement as per the Indirect Method, Non Cash and Non
OperatingchargesintheIncomeStatementareaddedbacktotheNetProfitswhileNonCash&
NonOperating Credits are deducted to calculate the Operating Profit before Working Capital
Changes. The Indirect Method of preparating of Cash Flow Statement is a partial conversion of
accrual basis profit to Cash basis profit. Further, necessary adjustments are made for
Increase/Decrease in Current Assets and Current Liabilities to obtain Net Cash Flows from
OperatingActivitiesaspertheIndirectMethod.
FormatofCashFlowsfromOperatingActivitiesIndirectMethod
Particulars
NetProfitbeforeTaxandExtraordinaryitems

Amount
xxx

Adjustmentsfor
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Depreciation

xxx

ForeignExchange

xxx

Investments

xxx

GainorLossonSaleofFixedAssets

xxx

InterestDividend

xxx

OperatingProfitbeforeWorkingCapitalChanges

xxx

Adjustmentsfor
TradeandOtherReceivables

xxx

Inventories

xxx

TradePayable

xxx

CashgeneratedfromOperations

xxx

InterestPaid

(xxx)

DirectTaxes

(xxx)

CashbeforeExtraOrdinaryItems

xxx

DeferredRevenue

xxx

NetCashFlowfromOperatingActivities(IndirectMethod)

xxx

II.CashFlowfromInvestingActivities
TheactivitiesofAcquisitionandDisposalofLongTermAssetsandotherInvestmentsnotincluded
in cash equivalents are Investing activities. Separate disclosure of Cash Flows arising from
Investing Activities is important because the Cash Flows represent the extent to which
expenditureshavebeenmadeforresourcesintendedtogeneratefutureincomeandcashflows.
FormatofCashFlowfromInvestingActivities:
Particulars
PurchaseofFixedAssets

Amount
(xxx)

(Add)ProceedsfromSaleofFixedAssets

xxx

(Add)Interestreceived

xxx

(Add)Dividendreceived

xxx

NetCashFlowfromInvestingActivities

xxx

III.CashFlowsfromFinancingActivities
FinancingActivities are those activities which result in a change in the size and composition of
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owners capital and borrowing of the organisation.The separate disclosure of cash flows arising
from financing activities is important because it is useful in predicting the claims on future cash
flowsbytheprovidersoffunds.
FormatofCashFlowfromFinancingActivities:
Particulars

Amount

ProceedsfromIssueofShareCapital

xxx

ProceedsfromLongTermBorrowings

xxx

RepaymentofLongTermBorrowings

(xxx)

InterestPaid

(xxx)

DividendPaid

(xxx)
NetCashFlowsfromFinancingActivities

xxx

TheComprehensiveFormatofthecompleteCashFlowStatementisasfollows:
Particulars

Amount

CashflowfromOperatingActivities(DirectMethod/IndirectMethod)

xxx

(Add)CashFlowfromInvestingActivities

xxx

(Add)CashFlowfromFinancingActivities

xxx

(=)NetIncrease/DecreaseinCash
(Add)OpeningBalanceofCash&CashEquivalents
(=)ClosingBalanceofCash&CashEquivalents

xxx
xxx
xxx

ABOUT THE AUTHOR

KaranBatra
APersonalFinanceenthusiast,Karanisthefounderofcharteredclub.comand
lovestodiscussaboutMoneyrelatedmatters.

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CashFlowStatementDirect&IndirectMethod

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