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Cash Flow Statement — Part 2: Preparation by the Indirect Method

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Lesson

Preparing the statement: the indirect method

Part 2 — from two balance sheets and additional information to a complete cash flow statement, with the cash check at the end.

In this lesson you will

Work out net profit before tax from the changes in surplus, reserves, dividends and the provision for tax
Adjust profit for non-cash items, non-operating items and working-capital changes to find cash from operating activities
Use working accounts for fixed assets, accumulated depreciation, investments and provision for tax
Prepare investing and financing sections and check the statement against the change in cash

The indirect method, step by step

Concept

Direct and indirect methods

Accounting Standard 3 allows both; the CBSE syllabus uses the indirect method only.
	Direct method (mention only)	Indirect method (in the syllabus)
Operating section starts from	Gross cash received from customers	Net profit before tax
Then	Deducts gross cash paid to suppliers, employees and for tax	Adjusts for non-cash items, non-operating items and working capital
Investing and financing sections	The same in both methods	The same in both methods

Concept

The format at a glance

Skeleton format of a cash flow statement by the indirect method: operating section from net profit before tax to net cash from operating activities, then investing and financing sections, the net change, and opening and closing cash
Cash flow statement (indirect method)	₹	₹
A. Cash flows from operating activities
Net profit before tax	xxx
Add: non-cash and non-operating charges; Less: non-operating income	xxx
Operating profit before working capital changes	xxx
Add / Less: changes in current assets and current liabilities	xxx
Cash generated from operations; Less: income tax paid	xxx
Net cash from operating activities		xxx
B. Cash flows from investing activities		xxx
C. Cash flows from financing activities		xxx
D. Net increase or decrease (A + B + C); add opening cash and cash equivalents		xxx
Closing cash and cash equivalents		xxx