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  • Indirect Method Template: Cash From Operations Start With Net Profit

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    chiayi91
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    This document provides an overview of the indirect method for calculating cash from operations. It explains that you start with net profit and then adjust for non-cash expenses and gains. You also adjust for changes in asset and liability accounts between periods to account for timing differences between when items affect net income versus cash flow. The adjustments are made to reconcile net income to the actual net cash provided by operating activities.

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    Cash Flow template

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    This document provides an overview of the indirect method for calculating cash from operations. It explains that you start with net profit and then adjust for non-cash expenses and gains. You also adjust for changes in asset and liability accounts between periods to account for timing differences between when items affect net income versus cash flow. The adjustments are made to reconcile net income to the actual net cash provided by operating activities.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    11 views1 page

    Indirect Method Template: Cash From Operations Start With Net Profit

    Uploaded by

    chiayi91
    This document provides an overview of the indirect method for calculating cash from operations. It explains that you start with net profit and then adjust for non-cash expenses and gains. You also adjust for changes in asset and liability accounts between periods to account for timing differences between when items affect net income versus cash flow. The adjustments are made to reconcile net income to the actual net cash provided by operating activities.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Indirect method template: Cash from operations

    Start with Net Profit


    Adjust for non-cash items
    Add back ( + ) depreciation This non-cash expense reduced profit, but did not reduce the net cash from operations.
    Add back ( + ) a loss on sale of an asset This non-cash expense reduced profit, but did not reduce the net cash from operations.
    Add back ( + ) a foreign exchange loss This non-cash expense reduced profit, but did not reduce the net cash from operations.
    Deduct ( - ) a foreign exchange gain This non-cash gain increased profit, but did not increase net cash from operations.

    Adjust for changes in accrual balances


    Assets: (increase) / + decrease
    When an asset increases it usually indicates that cash outflows have occurred to obtain the asset, but no 'expense' is incurred, so cash is lower than profits, and this needs adjusting.
    Accounts Receivable: (increase) / + decrease Credit sales will increase AR but not increase cash levels. So, these are deducted from net profit.
    Inventory: (increase) / + decrease Inventory purchases will reduce cash but not profits. So, increases must be deducted from the cash figure to reflect the cash balance.
    Prepaid expenses: (increase) / + decrease Prepayments will be recorded as assets, not expenses (so profits are not reduced) but cash levels will go down.

    Liabilities: (decrease) / + increase When a liability increases it usually reflects an increase in expenses but no cash payment has occurred. So, the cash flows will be higher than the net profit figure, and this difference is
    added back.
    Accounts Payable: (decrease) / + increase Extra items purchased on credit may have been sold (COGS) and reduce profits, but have not reduced the cash level, so these are added back.
    Provision for doubtful debts: (decrease) / + increase
    Accrued Expenses : (decrease) / + increase

    Net cash from operations

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