Question

Operating Activities

How do you determine cash flow provided by (used in) operating activities using the indirect method?

How is cash flow provided by (used in) operating activities determined using the direct method? How is this different from the indirect method?

Investing Activities

How do you determine cash flow provided by (used in) investing activities?

Financing Activities

How do you determine cash flow provided by (used in) financing activities?

What is the formula to calculate change in cash flow?

What are the steps to prepare the cash flow statement?

Explain the difference between the direct and indirect method.

What are some considerations that should be made when evaluating cash flow?

Answer 1

Formulas used in Direct maethod for calculating OCF:

Cash Receipts from Customers =
+	Net Sales
+	Beginning Accounts Receivable
?	Ending Accounts Receivable
Cash Payments to Suppliers =
+	Purchases
+	Ending Inventory
?	Beginning Inventory
+	Beginning Accounts Payable
?	Ending Accounts Payable
Cash Payments to Employees =
+	Beginning Salaries Payable
?	Ending Salaries Payable
+	Salaries Expense
Cash Payments for Purchase of Prepaid Assets =
+	Ending Prepaid Rent, Prepaid Insurance etc.
+	Expired Rent, Expired Insurance etc.
?	Beginning Prepaid Rent, Prepaid Insurance etc.
Interest Payments =
+	Beginning Interest Payable
?	Ending Interest Payable
+	Interest Expense

                                                                               

Income Tax Payments =
+	Beginning Income Tax Payable
?	Ending Income Tax Payable
+	Income Tax Expense

NOW ,

Cash received from customers            xxxxxx

• Cash paid to suppliers              (xxxxx)
• Cash payments to Eees            (xxxxx)
• Purchases of prepaid assets     (xxxxx)
• Interest payments                     (xxxxx)
• Income tax payments               (xxxxx)  

Cashflow from Operating Activities      xxxxxxx   

The following is the indirect method formula to calculate net cash flow from operating activities:

Cash Flows from Operating Activities:
	Net Income
+	Non-Cash Expenses:
	(Depreciation, Depletion & Amortization Expense)
+	Non-Operating Losses:
	(Loss on Sale of Non-Current Assets)
?	Non-Operating Gains:
	(Gain on Sale of Non-Current Assets)
+	Decrease in Current Assets:
	(Accounts Receivable, Prepaid Expenses, Inventory etc.)
?	Increase in Current Assets
+	Increase in Current Liabilities:
	(Accounts Payable, Accrued Liabilities, Income Tax Payable etc.)
?	Decrease in Current Liabilities
=	Net Cash Flow from Operating Activities

2. The direct method assumes that all sales and purchases are made on credit. Under this method, various types of cash receipts and cash payments are calculated and added to obtain the net cash flow from operating activities.

Using the indirect method, the net income figure from the income statement is used to calculate the net cash flow from operating activities. Since the income statement is prepared on an accrual basis, and there are a number of items on the income statement that affect net income but not cash flow, the earnings before interest and taxes (EBIT) must be adjusted for how much cash was actually generated by the business. To do this, noncash expenses, such as depreciation and amortization, are added back to net income. In addition, any changes to working capital, such as an increase and/or decrease in current assets and current liabilities are added to net income.

3. Cash flow from investing covers:

• Cash paid to purchase non-current assets(in minus)
• Cash received from selling non-current assets

4. . Cash flow from financing covers:

• Issuance of Stock or long term debt
• Dividend paid (in minus)
• Redemption of stocks or debts (in minus)

NOW,

Add all the 3 heads of cash flows. The result appear will be Net increase or decrease in cash and cash equivalent.

5. Comparing cash flow from operating activities with EBITDA can give insights into how a company finances short-term capital. Also, investors will examine a company’s cash flow from operating activities separately from the other two components of cash flow - investing and financing activities - to determine where a company is really getting its money. Investors want to see positive cash flow because of positive income from recurring operating activities. Positive cash flow that results from the company selling off all its assets, or because it has recently issued new stocks or bonds, results in one-time gains and is not an indicator of long-term financial health.