- The Indirect Method
- Start with Profit Before Tax (from Income Statement)
- Reverse depreciation and amortization / impairment charges as they are non-cash
- Reverse gains/losses on disposal of non-current assets as they should be shown in CFI
- Reverse gains/losses on the FV of financial instruments carried at FV through P&L as they are non-cash.
- Reverse gains/losses during step acquisitions (e.g. the gain/loss on derecognition of the associate which goes into P&L, or the gain/loss on the remeasurement of available-for-sale financial asset which goes into P&L) because they are non-cash.
- Reverse interest expense (from Income Statement), and replace with cash interest paid after the Cash Generated from Operations line.
- Reverse interest income (from Income Statement) as it should be shown in CFI
- Reverse charge for pension expense (current service cost, past service cost, expected return on plan assets) as they are non-cash.
- Adjust for changes in working capital (receivables, prepayments, inventory, payables, accruals except for accrued interest and accrued taxes) as they are sources/uses of cash.
- Subtract cash contribution paid into pension plan asset.
- Subtotal the above into Cash Generated from Operations
- Less cash interest paid
- Less cash tax paid
- Equals: Net Cash from Operating Activities
- Start with Profit Before Tax (from Income Statement)
Cash Receipts
- Trade Receivables (opening balance in Balance Sheet)
- + Sales (in Income Statement)
- – Cash Receipts (in Cash Flow Statement)
- = Trade Receivables (closing balance in Balance Sheet)
Cash Paid to Suppliers
- First calculate Purchases
- Inventory (opening balance in Balance Sheet)
- + Purchases (in ledger)
- – Cost of Goods Sold
- = Inventory (closing balance in Balance Sheet)
- Now we can calculate Cash Paid to Suppliers
- Trade Payables (opening balance in Balance Sheet)
- + Purchases (in ledger)
- – Cash Paid to Suppliers (in Cash Flow Statement)
- = Trade Payables (closing balance in Balance Sheet)
Cash Paid for Wages and Salaries
- Accrued Wages and Salaries (opening balance in Balance Sheet)
- + Wages and Salaries Expense (in Income Statement)
- – Cash Paid for Wages and Salaries (in Cash Flow Statement)
- = Accrued Wages and Salaries (closing balance in Balance Sheet)
Cash Tax
- Current Tax Liability (opening balance in Balance Sheet)
- + Deferred Tax Liability (opening balance in Balance Sheet)
- + Tax expense (in Income Statement)
- – Cash Tax Paid (in Cash Flow Statement)
- = Sum of (Current Tax Liability closing balance + Deferred Tax Liability closing balance)
Cash Flows from Investing Activities
Non-Current Assets Reconciliation Equations
- Cost
- Cost b/f
- + Additions
- + Revaluations [note that the revaluation gain/(loss) shown in the Statement of Comprehensive Income may be net of the increase in deferred tax liability due to the increase in carrying value (similar situation if it is a decrease). E.g. the gain shown may be $5M, but if the increase in deferred tax liability is $1M because of the revaluation, the revaluation gain was actually $6M.]
- – Disposals (the Cost or Revalued amount)
- = Cost c/f
- Accumulated depreciation
- Accumulated depreciation b/f
- + Depreciation charge for year
- – Depreciation removed due to disposals
- = Depreciation c/f
Cash from Disposal of Non-Current Assets
- Cost of disposed non-current asset
- – Accumulated depreciation of disposed non-current asset
- + Gain/(loss) on disposal
- = Cash flow from disposal of non-current asset
Cash Investment in Intangible Assets (e.g. capitalized development costs)
- Intangible assets (opening balance in Balance Sheet)
- + Intangible assets added from acquisition of Subs
- + Cash investment in intangible assets (in Cash Flow Statement)
- – Impairment or Amortization (in Income Statement)
- = Intangible assets (closing balance in Balance Sheet)
Cash Investment in Available-for-sale Financial Assets (carried at FV through OCI)
- Available-for-sale financial assets (opening balance in Balance Sheet)
- – Disposals
- + Gain/(losses) on remeasurement to FV [note that the gain/(loss) shown in the Statement of Comprehensive Income may be net of the increase in deferred tax liability due to the increase in carrying value (similar situation if it is a decrease). E.g. the gain shown may be $5M, but if the increase in deferred tax liability is $1M because of the increase in FV, the remeasurement gain was actually $6M.]
- + Purchase of available-for-sale investments (in Cash Flow Statement)
- = Available-for-sale financial assets (closing balance in Balance Sheet)
Interest received
- Interest receivable (opening balance in Balance Sheet)
- + Interest income (in Income Statement)
- – Interest received (in Cash Flow Statement)
- = Interest receivable (closing balance in Balance Sheet)
Government Grants
- Recognised as deferred income and is credited to Cost of Sales in the income statement over the period the grant relates to (which will lower Cost of Sales and increase Profits).
- The figure in the income statement would need to be reversed in the CFO when using the indirect method, and the actual cash received included here.
- Captured in the Balance Sheet under Liabilities
- Reconciliation equation
- Current Government Grant (opening balance in Balance Sheet)
- + Non-current Government Grant (opening balance in Balance Sheet)
- – Amortization of Government Grants (in Income Statement)
- + Cash received for new Government Grants (in Cash Flow Statement)
- = Sum of (Current Government Grant closing balance + Non-current Government Grant closing balance)
Cash Flows from Financing Activities
Cash Paid on Finance Leases
- Recognised as Liabilities in Balance Sheet
- Reconciliation equation
- Current Finance Leases (opening balance in Balance Sheet)
- + Non-current Finance Leases (opening balance in Balance Sheet)
- + New Finance Leases acquired
- – Cash Paid on Finance Leases (in Cash Flow Statement)
- = Sum of (Current Finance Leases closing balance + Non-current Finance leases closing balance)
Cash from Shares Issued
- Share Capital + Share Premium (closing balance in Balance Sheet)
- – (Share capital + Share Premium (opening balance in Balance Sheet))
- = Cash from new shares issued
Cash from Loans
- Current Loans + Non-current Loans (closing balance in Balance Sheet)
- – (Current Loans + Non-current Loans (opening balance in Balance Sheet))
- = Cash inflow / (Cash outflow) from new loans or repayment of loans
Dividends Paid
- Retained Earnings b/f
- + Profits (from Statement of Comprehensive Income)
- – Dividends Paid (in Cash Flow Statement)
- = Retained Earnings c/f
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