Question

1. When using the Indirect method or the direct method, net cash flows from operating activities will never be the same! True or False and please explain.

2. Please provide three examples of items you believe could be classified as extraordinary losses and tell me why.

Answer 1

1.When using the Indirect method or the direct method, net cash flows from operating activities will be same.

direct method:under this method,the actual cash receipts from operating revenues and the actual cash payments for operating expenses are arranged and presented in cash flow statement.the defference between the cash receipts and cash payments are the net cash flow from operating activities.

indirect method:under this method,the net profit/(loss) is taken as base and then adjusted items that affected net profit,but not affected cash.non cash and non operating charges in theprofit and loss account wil added back to the net profit while non cash and non operating credits are deducted to calculate oprating profit before working capital changes.it is a partial conversion of accrual basis profit to cash basis profit.then necessary adjustments wil made in current assets and current liabilities to obtain net cash from operating activities.

so under both method calculations,the net cash flow friom operating activities wil get the same amount.

2.

extra ordinary losses examples:a) loss on account of earthquakes,flood,etc

b) loss on sale of discountinued business segments

c) Loss on account of losing a legal case which has led to huge tax penalties

reason: the above mentioned items are not an ordinary activity of a running business and so we cannot consider it as either operating/investing/financing activities ,but at the same time it is the loss of the said businees also,hence it giving a seperate traetment.