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Calculating cash flow from operating activities
The document discusses the direct and indirect methods for reporting cash flows from operating activities according to PAS 7. It provides examples of income statement accounts and their related adjustments to reconcile net income to net cash flow from operating activities. Specifically, it discusses decreasing or increasing current assets and liabilities as adjustments to net income, along with other non-cash expenses like depreciation. The net cash flow from operations is calculated by adjusting net income for non-cash items and changes in balance sheet accounts and equals interest paid, income taxes paid, and net cash from operating activities.
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Calculating cash flow from operating activities
- 2. • PAS 7,paragraph 18, provides that an entity shall report cash flows fro operating activities using either the direct method or indirect method.
- 3. • It showsin detail or itemizes the major classes of gross cash receipts and gross cash payments.
- 4. 1) Cash collectedfrom customers2) Interest, fees, royalties and dividends received 3) Other operating cash receipts4) Cash paid to employees and other suppliers of goods or services 5) Interest paid6) Income tax paid 7) Other operating payments8) Contracts held for dealing or trading purposes
- 6. Income Statement Accounts Adjustments Cash Flows from Operating Activities Sales revenue +Decrease in Accounts Receivable - Increase in Accounts Receivable + Increase in deferred revenue - Decrease in deferred revenue Collection from customers Income Statement Accounts Adjustments Cash Flows from Operating Activities Interest revenue and dividend revenue + Decrease in Interest Receivable - Increase in Interest Receivable + Amortization of premium on investment in bonds - Amortization of discount on investment in bonds Interest and dividends collected Income Statement Accounts Adjustments Cash Flows from Operating Activities Other revenue + Increase in unearned revenues - Decrease in unearned revenues - Gains on disposals of assets and liabilities - Investment income (equity method) Collection from customers
- 7. Income Statement Accounts Adjustments Cash Flows from Operating Activities Cost ofgoods sold + Increase in inventory - Decrease in inventory - Decrease in accounts payable - Increase in accounts payable Payments to suppliers Income Statement Accounts Adjustments Cash Flows from Operating Activities Selling and administrative expenses - Depreciation, depletion and amortization expense + Decrease in accrued expenses - Increase in accrued expenses + Increase in prepaid expenses - Increase in prepaid expenses Payments of operating expenses Income Statement Accounts Adjustments Cash Flows from Operating Activities Interest expense + Decrease in Interest payable - Increase in Interest payable + Amortization of premium on bonds payable - Amortization of discount on bonds payable Payments of Interest Income Statement Accounts Adjustments Cash Flows from Operating Activities Other expense - Losses on disposals of assets and liabilities - Investment loss (equity method) Other operating payments Income Statement Accounts Adjustments Cash Flows from Operating Activities Income tax expense + Decrease in Income taxes payable - Increase in Income taxes payable + Increase in deferred Income taxes payable - Increase in deferred Income taxes payable Payments of income taxes
- 8. • Report amountof net cash flow by adjusting net income to reconcile it to net cash flow from operating activities.
- 9. • It meansthat the net income or loss is adjusted for the effects of transactions of a non cash nature, any deferral or accruals of past or future operating cash receipts and payments and items of income or expense associated with investing and financing activities
- 11. • Decreases incurrent assets Interest taxes Plus Increases in current liabilities Depreciation, depletion and amortization expense Amortization of discount on bonds payable Amortization of premium on investment in bonds Increase in deferred income taxes Subsidiary loss under the equity method Interest expense
- 12. • Increase incurrent assets Minus Decrease in current liabilities Amortization of premium on bonds payable Amortization of discount on investment in bonds Decrease in deferred income taxes Gain(net) on disposal of assets or liabilities Subsidiary gain under the equity method
- 13. Net Cash FlowFrom Operations Equals Interest Paid Income taxes paid Net Cash From Operating Activities