Cash Flows Into Three Separate Sections

1234 WordsMar 20, 20175 Pages
Perks (2007) IAS7 classifies cash flows into three separate sections: Operating activities, Investing activities, Financing activities. Operating activities Cash flows arising from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to maintain the operating capability of the entity, repay loans, pay dividends and make new investments without recourse to external sources of financing. Simply put, operating activities are the main revenue producing activities of the business that are not investing of financial activities. Operating activities may include; cash received from customers from the sale of goods or services provided, cash paid to suppliers towards the…show more content…
Calculation of Net Cash Flows from Operating Activities by Indirect method Indirect Method Format Cash Flows from operating activities £ Net Profit x +Goodwill x +Depreciation x +Loss on disposal of an asset x Increase/decrease in stock x Increase/decrease in Debtors x Increase/decrease in Creditors x Net cash flow from operating activities x First of all, need to remember that this is not going to figure out financing or investment, but going to get operations. The operating activities section of the statement of cash flows all start with Net Income. This need to begin with accrual accounting Net Income and reconcile adjusting items to arrive at Net cash from operating activities. Next, the company need to add back non-cash items like depreciation expense and amortization. Depreciation is non-cash items because it is an estimate of the location of the cost of non-current assets to the particular year. What the Ltd needs to do next is that they need to remove the non-cash items. For example, debt depreciation is an expense that means to arrive at the Net income; it needs to minus in depreciation then will get the profit. So, the Ltd needs to add it back in order to remove the depreciation. Amortization is something the company has advertised and discount which took away from the Net income and then add back to Net income to figure it out what has happened to it. We subtract gains and add back

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