In the Indirect Method of Cash Flow Statements, explain the reasons for certain items added and subtracted

August 19th, 2011 Comments off
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To prepare a proper cash flow statement using the indirect method, we also need to fully understand the reasons or rationales for some items added and other subtracted.Those items which are added or subtracted & the rationale for doing so:

  • DEPRECIATION is not a cash expense which was originally deducted from the profit figure in the income statement. Therefore it is logical to eliminate it by adding it back
  • A LOSS ON DISPOSAL OF A NON-CURRENT ASSET arising through underprovision needs to be added back and a profit deducted
  • An INCREASE IN INVENTORIES means LESS CASH –  hence deducted
  • An INCREASE IN RECEIVABLES means the company’s debtors have not paid as much and therefore there is LESS CASH –hence deducted
  • A DECREASE in payables means the company pays off the payables/creditors again the company has LESS CASH hence deducted.

 

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Financial Accounting

 
 

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