Question

Identify what would be added to net income when calculating income from operations using indirect method.

Answer 1

There are 2 methods of drawing a cash flow statement & both methods differ only with respect to operating activities . Whereas financing and investing activities would be calculated in the same manner under both methods . The indirect operating activities always starts with the net income for the period and then non-cash expenses, gains, and losses that need to be added back to or subtracted from net income are adjusted accordingly from it .    Items to be added to net income while calculating income from operations using indirect method are as follows : 1. Non-cash expenses & losses which includes - Depreciation expense, depletion expense , amortisation expense, gain or loss arising from sale of assets etc . 2. Changes in current assets specifically saying only if there is decrease in the assets we add such items (When an asset increase it means there has been further purchase of it indicating outflow of cash and vice Versa. Thus Asset account increases -deduct ; Asset account decreases -add. 3.Changes in current liabilities specifically saying only if there is increase in the current asset . (When a liability increase it means there has been further increase in creditors or bills payable then it would be added and vice Versa ) Thus Liability account increases - add ; liability account decreases-substract . Summary : 1.Non-cash expenses and other losses and gains . 2. Decrease in the current asset . 3.Increase in current liabilities.