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Postby sairamu217 » Wed Jan 30, 2013 2:12 pm

please explain operating cash flows indirect method slide no 73.

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Postby pankaj » Fri Feb 01, 2013 1:46 pm

Under indirect method of preparing cash flow statement, only the method of preparing cash flow from operation is different, however, method of preparing cash flow from investing and financing activity are one and same under both direct and indirect method.
So, under indirect method, to calculate CFO, we adjust Net Income for the following items:
1. any non-operating activity
2. any-non cash expenses
3. changes in operating working capital items.

So, going back to our slide 73.

we are starting with Net iNcome
Adding: Depreciation (its a non-cash expenses- money is not going out of the business)
Adding: Loss on sale of assets (since this loss is not due to business's core operation, needs to be added back in the CFO and deduct from the investing activity)
Adding: Deferred Income Taxes (here deferred income taxes has positive sign so it means increase in deferred income tax liability. so, any increase in liability means inflow for the business and vice-versa)
than, we are adjusting for changes in working capital items.
so, any increase in current assets is out flow for the business because we current assets increases money goes out of the business. likewise, any decrease in current assets in in-flow for the business, its like our are selling/discounting your current assets and collecting the cash.
For Current liabilities
any increase is inflow
any decrease is outflow. as you are paying your liabilities
Therefore, adjusting this items from the NI we get the CFO

Hope this helps!

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