Cash Flow Statements Indirect Method

Cash Flow Statements - Indirect method – Reconciliation for Cash from Operations –from Accrual profit to Cash generated.
Accrual profit recorded items below that did not involve Cash
Action to derive Cash
Explanations and reasons for adjustments necessary to derive Cash from Operations [Profit making activities]
1 Depreciation buildings
Add back
Non cash expense that reduced profit
2 Proceeds from sale of Asset deduct Non cash gain or profit that increased profit
3 Carrying amount of Asset sold
Add back
Non cash expense/loss that reduced profit
4 Loss on Disposal of Asset
Add back
Non cash Loss/expense that reduced profit. When 3 exceeds 2
5 Profit on Disposal of Asset
Deduct
Non Cash Profit/revenue. When 2 exceeds 3
6 Increase in current tax liability
Add back
Expense but not cash as DR Expense CR Liability
[Companies only]
7 Credit sales
Deduct
Non cash gain or profit
8 Cost of sales
Add back
Non cash expense that reduced profit
9 Stock /Stock valuation losses
Add back
Non cash expense that reduced profit
10 Stock gain
Deduct
Non cash gain or profit
11 Discount Allowed
Add back
Non cash expense that reduced profit
12 Discount Received
Deduct
Non cash gain or profit
13 Bad debts
Add back
Non cash gain or profit [direct method]
14 Doubtful debts
Add Back
Non cash gain or profit [allowance method]
15 Sales returns/allowances
Add back
Non cash expense [ contra entry] that reduced profit
16 Purchases returns
Deduct
Non cash gain or profit [contra entry] that increases profit
17 Stock of supplies used
Add back
Non cash expense that reduced profit

Indirect Method
Changes in Current assets and Liabilities by comparing Balance Sheets

If expense creates a liability, it means cash has not been used for the expense, therefore increases should be added back. Opposite applies when a decrease in liabilities occurs. If current assets decrease, it means that expenses have caused the decrease; therefore should add back the decrease as Cash has not been used for the