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Doubts in cash flow

Harish Kumar (IPCC) (475 Points)

22 December 2012

In Indirect method of Cash flow Why we not take Salary paid, Rent Paid & so on.....

& why we take General reserve, Goodwill W/F, etc. (its beacuse of the Capital Nature item or Any other reason behind it)

Please clear my doubts.................!!

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3 Replies

CA Hareesh ( ) (1637 Points)
Replied 23 December 2012

Because the items like Salary and Rent paid are cash transactions and cash would have actually gone out of the enterprise when we make payment.. therefore no adjustment is needed.

whereas items like goodwill writing off are purely P&L entries and there is no actual cash outflow in that. Not because they are capital in nature, the reason is they are NON CASH Transactions (like depreciation and provisions) and therefore it is added back.

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Harish (CA Student) (568 Points)
Replied 24 December 2012

When we see the Format of Indirect method, it starts from Profit /Loss before Extra-ordinary or Exceptional items and tax. That means, when above figure of profit is taken, no need to consider any revenue expenses since it is already taken into account while getting the profit figure.

Goodwill written off, preliminary expenses written off, any other non-cash operating items must be added back to profit since we are preparing cash flow statement on Cash basis and not on Accrual basis.

Above is my explanation about your question. Correct me if I am wrong.

Thanks and Regards

Harish. A

CA. Ram Naresh Sharma (CA) (22 Points)
Replied 24 December 2012

In Indirect method of cash flow it is based on the assumption that all the profits we earned is realised in cash, expenses which is paid is already deducted from profit so there is no need for further deduction.

In case of goodwill w/o & other non cash expenses there is no out flow of cash but it is debited in the profit & loss A/c it is added back.