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Difference between direct and indirect cash-flow with example.

Cash flow can be prepared with the help of two methods. Both of these methods are widely used in various companies according to their requirements however I.A.S (international accounting standard) allow all the firms and companies to prepare cash flow with any of these methods.

(i) Direct method
(ii) Indirect method

Both the Direct and indirect methods of cash flow can be understood with the example given below.

Direct Method=

It explains cash details in authentic way.
In direct method, entries are made on Accrual basis related to cash.

                                                             Statement of  Cash Flows (Direct Method-Format)
                                                                     for the XYZ company
                                                             for the period 1st July – 30th June
            Cash Flows from Operating Activities:


Add: Cash Receipts from revenue from operations
        xxx

Add: Cash Receipts from miscellaneous revenue
        xxx 

Less: Cash Payments for operating expenses
       (xxx)

Less: Cash Payments interest expenses
       (xxx)

Less: Cash Payments income tax expenses
       (xxx)

(Add) or (less) : Net Cash Flow from Operating Activities

   xxx / (xxx)
              Cash Flows from investing Activities:


Add: Proceeds from sales of capital assets
       xxx

Add: Proceeds from sales of marketable securities
       xxx

Less: Payments for capital assets
      (xxx) 

Less: Payments for marketable securities
      (xxx)

(Add) or (Less): Net Cash Flow from Investing Activities

   xxx / (xxx)
               Cash Flows from Financing Activities:


Add: Proceeds from short and long term borrowings
       xxx

Less: Repayments for short and long term borrowings
      (xxx)

Less: Payments of dividends
      (xxx)

(Add) or (Less): Net Cash Flow from Financing Activities

   xxx / (xxx)



 Net increase or decrease in Cash

   xxx / (xxx)
Cash Balance at the Beginning  

   xxx / (xxx)
Cash Balance at the End

   xxx / (xxx)

Note: The net result may be positive or may be negative based on the activities cash inflow and outflow.

Indirect Method=

Indirect method shows net income from income statement which is treated with loss and gains after which Cash basis entries are made including depreciation, amortization etc. you can check its example below.

                                                             Statement of  Cash Flows (Indirect Method-Format)
                                                                     for the XYZ company
                                                             for the period 1st July – 30th June
            Cash Flows from Operating Activities:


Profit/(Loss) before taxation
 xxx/(xxx)

Add: Depreciation
        xxx

Add: Loss on disposal of non-current assets
        xxx 

Less: Profit on disposal of non-current assets
       (xxx)

Add: Finance cost
        xxx

Less: Investment Income
       (xxx)

(increase)/Decrease in inventories
(xxx)/xxx

(increase)/Decrease in receivables
(xxx)/xxx

increase/(Decrease) in trade payables
xxx/(xxx)

increase/(Decrease) in other payables
xxx/(xxx)

Cash generated from operations
xxx/ (xxx)

Less : Taxation paid
   (xxx)

Less: Interest paid
   (xxx)

(Add) or (Less):Net Cash Flow from Operating Activities

   xxx / (xxx)
              Cash Flows from investing Activities:


Less: Purchase of non-current assets
      (xxx)

Add: Sale of non-current assets
       xxx

Add: Interest received
       xxx 

Add: Dividend received
       xxx

(Add) or (Less): Net Cash Flow from Investing Activities

   xxx / (xxx)
               Cash Flows from Financing Activities:


Add: Proceeds from issues of shares
       xxx

Add: Proceeds from long term borrowings
       xxx

Less: Payments of finance lease liabilities
      (xxx)

Less: Redemption of shares
      (xxx)

Less: Redemption of loans
      (xxx)

Less: Dividend paid
      (xxx)

(Add) or (Less): Net Cash Flow from Financing Activities

   xxx / (xxx)



 Net increase or decrease in Cash

   xxx / (xxx)
Cash Balance at the Beginning  

   xxx / (xxx)
Cash Balance at the End

   xxx / (xxx)

Note: The net result may be positive or may be negative based on the activities cash inflow and outflow.



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