Question

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1. What is the indirect statement of cash flows? 2. Distinguish between the three types of activities reported in the statement of cash flows. 3. What is the impact of depreciation on the indirect statement of cash flows and describe why it is accounted for that way.

Answer 1

1.Indirect statement of cash flow is a way of preparing cash flow statement where net profit is added back with non cash expenses and other adjustments like gain/loss on sale of assets,interest income etc and then changes in Current assets and Current liabilities are adjusted to arrive at Cash flow from Operating activities. There is no changes in the way Cash flow from investing activities and financing activities is shown in cash flow statement

2. Cash flow from Operating activities- This shows cash flows due to operating activities - receipts from customers, payment to suppliers and other vendors, payment of operating expenses, payment of interest and taxes

Cash flow from Investing activities - This shows cash flows due to acquisition and sale of fixed assets, investments,etc

Cash flow from Financing activities- This shows cash flows due to new equity issued, payment of dividend, interest,etc

3. Depreciation is added back to net profit in preparing cash flow using indirect method. The reason is depreciation is a non cash expense and hence added back to net profit to arrive at cash flow from operating activities.