Question

3. What is the relationship between cash flows from operations and Income for the year of the statement?

4. Explain the difference between the direct method and the indirect method of disclosing cash flows from operations.

5. Do you believe that cash inflows and outflows associated with nonoperating items such as interest expense, interest revenue, and dividend revenue, should be separated from operating cash flows? Explain.

Answer 1

3	Income for the year can be easily told as the mathematical accuracy of all the incomes put together including non-cash income that forms a part of the entity's income for the year less expenses including any loss or non-cash expenditure that pertains to the year.
	Cash flow from operating activities refers to the original cash in and outflow of an entity thereby excluding the non-cash expenditures and non-cash incomes. In addition to that the adjustment to net income is made in order to check what is the exact flow of cash in the operations of the entity also eliminating those cash activities that are in the nature of investing and financing or simply said as non-operating items.
4	Direct method of disclosing the cash flow from operations identifies the cash flow activities that are solely in the operating nature. Hence the cash inflows and outflows are considered and the net cash in/(out)flow is determined.
	Indirect method of cash flows has the net income for the year as the base for its cash flow determination. All the adjustments such as non- cash expenses, non-cash incomes, transactions in the income account which are in the investing and financing nature. Changes in the working capital also is considered the indication for the cash inflow and outflow of the entity and hence the changes in working capital is also taken into consideration and the net cash flow from operating activities is determined.
	For this the previous years figures and the current year figures are to be given. Whereas for the direct method any such is not required.
5	Yes. The cash inflows and outflows associated with the non-operating items such as interest expense, interest income, dividend income should be separated from cash from operating activities. Since the interest income received or the dividend income received is due to the investments made.Therefore, they are in the nature of investing activities and hence should be shown under the respective head. Interest expense on the other hand might be due to funding any amounts and hence this doesn't form part of cash from operating activities.