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Cash Flow Statement Indirect Method

For XYZ Group , Year ended 31 December 20X1 ($mn)


Net income XX
Add: Non cash expenses (depreciation etc.) X
Less: Non cash income (gains from asset sales etc) (X)
Add: deductions shown elsewhere (interest, dividends) X
Less: Increases in non cash working capital assets (X)
Add: Decreases in non cash working capital assets X
(reverse above two for liabilities) ....
Cash Flow from Operations XX
Capital expenditures (X)
Cash from asset sales X
Cash Flow from Investing X
Cash from equity issues X
Increase (decrease) in borrowing X
Dividends and interest payments (receipts) (X)
Cash Flow from Financing X
Net Cash Flow XX
(to reconcile with change in Balance Sheet)
CASH FLOW STATEMENTS (CFS)
Cash here includes cash equivalents, e.g. bank
checking/current-account balances.
CFSs are the third type of financial statement
included in the annual reports of most large
companies.
They provide an alternative view of company
activities to the Income Statement, not using
accruals accounting.
As such, they largely avoid dependence on
accounting policy variations (and some forms
of creative accounting, but not all).
They apply a very conservative version of the
realization principle, so are even less future oriented
than Income Statements.
An Income statement explains change in retained earnings in the
Balance Sheet, a Cash flow statement explains changes in (near)
cash balances.
The Income Generation Process
Realization?
Idea Economic Income
Plan, Organize,
Order resources
Public Sector
Appropriation System
Receive Resources
Production
Pay cash
Finished Product
Sale
Receive Cash
Long Term Contracting
Extractive Industries
Normal Accruals Basis
Cash Flow Basis
CFSs Presentational & Measurement
Issues
What is cash? cf. Measurement of
Money Supply.
Direct versus Indirect methods of
computing cash flows.
Direct method mostly reorganization of
bank statements!
Classification: operating, investing &
financing cash flows.
Indirect method start with accruals
information, and undo accruals.

CFSs Financial Analysis Issues
Creative accounting teeming & lading.
No clear distinction between categories of cash
flow.
Treatment of exchange rate changes.
Computation of Free Cash Flow CFO less
capital expenditures necessary to maintain
present productive capacity?
Effects of business/product life cycles?
Corporate/business strategy.
Lumpiness of cash flows, predictive use.

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