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Hey, can anyone plz help with the following …
Statement of Cash Flows > Indirect Method > Cash Flows From Operating Activities > Adjustments for depreciation, investment income, and interest expense
In the proforma for the statement cash flows (indirect method) it shows that depreciation and interest expense are added back, and investment income is deducted – why is this…? i’m using ‘get through guides’ for this paper and have read over the notes but still can’t seem to understand… any help would be great… thanks,
Max K
depn and int exp r non-cash items. exp u wld hv ‘spent’ so now you add back to reverse its effect. on the other hand inv income money came in, now to reverse u deduct. that’s how it works. think abt its original effect on cash flow.wiz practice
u will understand.(dont try memorising )This document is a statement of CASH flows. Depreciation and interest expense are not CASH flows, but have been deducted in arriving at profit before tax. Therefore, we need to add them back. Similarly, investment income has been added in arriving at pbt – but investment income is not a CASH flow so we need to deduct it from pbt in the Statement of Cash Flows.
Now, having made those adjustments, we need to calculate exactly how much interest has been PAID IN CASH ( and how much investment income has actually been RECEIVED IN CASH )
These calculated amounts will appear ( interest paid in Operating Activities and investment income in Investing Activities )
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useful information indeed, i didnt understand either.
Well, I think you have the right idea, but you’ve put it in a confusing way! The cash paid to buy a short-term investment ? You’re correct, it isn’t shown as a MOVEMENT ( neither “operating”, “investing” nor “financing”
However, it is included within the “cash equivalent” element of “cash and cash equivalents” so in that way, it IS included in the cash flow statement. It’s just not shown as an outflow within “investing activities” as would a payment to buy an investment which is not classed as short-term
Hope that helps – I think you were probably correct in your post. It just wasn’t totally clear to me. Sorry if I’ve confused you!
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thanks for your further elaboration, you made it more clear for me.
hi mike, do cash flow have a choice either direct or indirect method? will the qns mention which to be used?… thanks
Hi – if he asks a cash flow question, he has so far always directed you to use the indirect method. You should be aware that direct method is benchmark but, other than that ( and knowing the technical difference between the two methods ) he’s not likely to ask you to prepare a cash flow using direct method
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how about increase and decrease in current assets. how do you account for them in Statement of Cash flow
In the indirect method, the movement in inventory, receivables and payables from one year to the next is shown as an inflow or outflow in the operating activities section of the cash flow statement. ( Have you looked at the course notes – or checked out the video? )
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