Hi, Thnx for previous query......
Pl inform why we add decrease in CL into Operating Activities and Increase in CL is subtracted from NPAT to find Cash Operating Profit. What is the logic behind it ?
thanks n regards,
Shalini,
Patricia (C.S.- Professional) (sdd) (197 Points)
29 November 2009Hi, Thnx for previous query......
Pl inform why we add decrease in CL into Operating Activities and Increase in CL is subtracted from NPAT to find Cash Operating Profit. What is the logic behind it ?
thanks n regards,
Shalini,
@ Pratricia
Could not see your previous quetion.
Increase and decrease in working capital is adjusted in cash flow from operating activities when indirect method is used. If you check the direct method of computing cash flow then all inflows and outflows are directly adjusted.
Whereas in indirect method we follow the reverse method. Hence we adjust for changes in WC. Let me know if you get my point and whether you need any further explanation...
CA.kaya
(Chartered accountant)
(3990 Points)
Replied 29 November 2009
we dont add decraese in current liability , we deduct decrase in CL in cash flow...
for eg : CL say creditors balance come down means creditors are paid off. means decrease in cash. so we deduct that difference in creditor balance from cash so that to arrive at closing balance of cash..
Q: op. cash 10000 op.crs 5000 cl. cash 8000 cl. crs 3000
A: op.cash 10000
- crs 2000(5000-3000)
cl.cash 8000
Agree with Kaya we dont add decrease in CL rather we deduct the same and vic-versa.
The logic behind this is that when CL get decrease it means that we are paying off our creditors, o/s exp, etc. Hence there is cash outflow and the same gets deducted from cash flow from operating activities.
Similarly, increase in CL implies that we havent paid to creditors so there is no cash outflow hence it gets added..
CA HARPREET SINGH
(Job)
(317 Points)
Replied 30 November 2009
Patricia it is very simple.....whenever CURRENT LIABILITY is decrease we reduce it from operating income,the logic behind it is that the current liability is reduced only by paying(i.e. cash outflow) & nothig else..& Whenver Current Asset is increased we also reduce it from operating income,Current Asset is increased only due to purchase of Current Asset(i.e. cash outflow) & vice versa.....
CA Rahul Jain
(CA)
(1162 Points)
Replied 30 November 2009
Increase/Decrease in CL are due to operating activities of a concern. eg when we purchase goods on credit, our creditors increases and when the payment is made to the suppliers, CL decreases. this inc/dec in the level of CL is due to the operating activities of a concern. hence the cash flow from operating activities is adjusted.
sanjeev
(Manager- Accounts/Tax/Finance)
(229 Points)
Replied 30 November 2009
Dear,
Just go by practical view and concept of operating activities/profit.
Opertational profit/loss is amount resulting from direct operating activities of business. This does not include the items of extraordinary nature like rental income( if not main business) and further profit or gain from loss of any fixed assets of company, provisions for taxation etc.
At the time of drafting balance sheet of company /firm proper classification of items betwenn current liabilities, provisions and current assets should be done. If only creditors for goods are included in Current liabilities and Admin Expenses payable are inclueded in Provisions and on other side in current assests Debtors net of Provision for Bad debts are given alongwith Cash/Bank Balances etc. then all these relate to operational activities of company and hence any increase in debtors/stock would result in block of capital and reduction result to inflow of funds. Reverse thing is on liability side. Reduction in liability result to outflow of funds and increase in liability inflow of funds in forms of less pay offs for goods and services acquired.
Best
Sanjeev
Harsiddhi Ruparel
(Articled Assistant)
(69 Points)
Replied 30 November 2009
Decrease in CL means that Cash flows out, hence it reduces cash. and this reduction is due to operations of the entity... therefore subtracted from it. Talking abt CA, wen it reduces, Cash comes in........ i.e, our debtors pay us and the cash stuck get free and hence it is added to operating profit... and vice versa happens in both cases. I hope ur query is solved to a certain extent. :)
Anup rathi
(CA FINAL)
(268 Points)
Replied 30 November 2009
Actually d query asked by u is wrong as we add decrease in cl as it implies dat we dont hv 2 meet are cl nemore so dat much cash will b left hence we add n viceversa of above for increase in cl
hope u find my ans logical
Ca kirti Nagpal
(CA)
(274 Points)
Replied 30 November 2009
hey we don't take all current liabilities so 2 say increase or decrease in cl is wrong we only adjust those items of cl which r of operating nature 4 e.g we take bank od in investing activity but actually it is a current liability.vaise kaya is right
CA.kaya
(Chartered accountant)
(3990 Points)
Replied 30 November 2009
| Originally posted by :kirti nagpal | ||
| " | hey we don't take all current liabilities so 2 say increase or decrease in cl is wrong we only adjust those items of cl which r of operating nature 4 e.g we take bank od in investing activity but actually it is a current liability.vaise kaya is right | " |
ya you are correct we dont take all CL in opereting actvity.but do we take bank o/d in investing activity???
Desperado
(Cost And Management Accountant)
(129 Points)
Replied 01 December 2009
Patricia, Either you are required to restructure your question or concept of preparation of cash flow should be made out from IAS 7.
Non of the aforementioned reply is satisfactory, which might help you.
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