ABC LTD reported the following information in the past year.


$
Net Income 100,000
Depreciation expenses 50,000
Interest expenses for this year 30,000
Interest expense paid for this year interest incurred 12,000
Interest expense paid for prior years' interest incurred 20,000

Compute the net cash inflow/(outflow) of operating activity.

My Ans help if its wrong

Net income 100,000
Depreciation expenses 50,000
Interest expenses for this year 30,000
Interest expense paid for this year interest incurred (12,000)
Interest expense paid for prior years' interest incurred (20,000) 48,000

Net cash inflow/(outflow) of operating activity. 52,000

Interest expenses for this year 30,000
Interest expense paid for this year interest incurred (12,000)
Interest expense paid for prior years' interest incurred (20,000)

Net cash (outflow) of operating activity (2000)

My Ans help if its wrong

Net income 100,000
Depreciation expenses 50,000
Interest expenses for this year 30,000
Interest expense paid for this year interest incurred (12,000)
Interest expense paid for prior years' interest incurred (20,000) 48,000

Net cash inflow/(outflow) of operating activity. 52,000

The correct format is as follows:
Net income ------------ 100,000
Depreciation ----------- 50,000
Interest expense ------ 30,000
Cash generated from operations 180,000
Interest paid ----------------------- 32,000
Net cash inflow from operating activities 148,000

Caution
The answer is based on the information provided. However, it is also necessary to adjust for:
Gain or loss on disposal of assets
Changes in working capital items
Tax expense and tax paid

The correct format is as follows:
Net income ------------ 100,000
Depreciation ----------- 50,000
Interest expense ------ 30,000
Cash generated from operations 180,000
Interest paid ----------------------- 32,000
Net cash inflow from operating activities 148,000


I get the math. I don't get the terminology. I know there's a totally different way of doing a cash flow that I'm not familiar with (and can't say as I understand). But I don't get how 180,000 can be CASH generated from operations. Depreciation is non-cash so is added back in. But interest isn't "non-cash." There's a 2000 difference between expense and cash, but the whole 30,000 isn't non-cash.

In the long-run you're actually netting out at that (2000) that has to come off net income cause it's additional negative cash flow. I don't get the sub-total of 180,000 in between. Seems like "cash generated from" and "net cash inflow from" mean the same thing.

I get the math. I don't get the terminology. I know there's a totally different way of doing a cash flow that I'm not familiar with (and can't say as I understand). But I don't get how 180,000 can be CASH generated from operations. Depreciation is non-cash so is added back in. But interest isn't "non-cash." There's a 2000 difference between expense and cash, but the whole 30,000 isn't non-cash.

In the long-run you're actually netting out at that (2000) that has to come off net income cause it's additional negative cash flow. I don't get the sub-total of 180,000 in between. Seems like "cash generated from" and "net cash inflow from" mean the same thing.

I can understand your problem. I have been using the International Accounting Standards format. IAS 7 Statement of Cash Flows permits presentation of interest and taxation as operating or financing cash flows while US GAAP permits as operating.

I have attached a pdf file which guides you on the differences between IFRS and US GAAP

I will tuck that away for future use. (I just have NOT had the time to sit down and deal with any of that stuff. Unfortunately for my real work, we now are getting people from a university in Australia, so I'm going to get forced into dealing with it sooner than I would have liked. So far it hasn't been an issue and they've been really good about understanding we don't necessarily know that stuff. At least hanging around here I already recognize some differences in vocabulary - that helps.)

(Just as another note, I've always thought it a bit odd putting interest in operations anyway. I could actually see an argument for putting it in financing.)

I think the IAS7.20 is the different format I've been seeing. I don't know that, but I've been seeing a totally different presentation for operations than what I'm familiar with. But it's nice to see there's two of them, making me think the GAAP way does at least exist elsewhere. One of those students in Australia did know that way.

ANYWAY, that's really not answering the question. It's still in operating so not a problem by me. But you are, in the long-run, doing essentially an indirect method. That method is going to start with 100,000 and make the adjustments. The adjustment for interest is the (2000). Your way has that net, but separated into two places.

I'm saying I don't understand where the subtotal of 180,000 is coming from and calling that "cash" when the 30,000 of interest isn't cash, and it isn't an adjustment to cash. 32,000 is the actual cash (direct method) and (2000) is the adjustment (indirect). I'm not understanding the separation of 30,000 in one place and (32,000) in a different place. That is not even like the other format I've been seeing.

BYW, soneeya1, just so you don't get confused over all this other detailed jibberish, the important point to you is that it's 148,000. That 48,000 of yours is a PLUS not a minus.

I will tuck that away for future use. (I just have NOT had the time to sit down and deal with any of that stuff. Unfortunately for my real work, we now are getting people from a university in Australia, so I'm going to get forced into dealing with it sooner than I would have liked. So far it hasn't been an issue and they've been really good about understanding we don't necessarily know that stuff. At least hanging around here I already recognize some differences in vocabulary - that helps.)

(Just as another note, I've always thought it a bit odd putting interest in operations anyway. I could actually see an argument for putting it in financing.)

I think the IAS7.20 is the different format I've been seeing. I don't know that, but I've been seeing a totally different presentation for operations than what I'm familiar with. But it's nice to see there's two of them, making me think the GAAP way does at least exist elsewhere. One of those students in Australia did know that way.

ANYWAY, that's really not answering the question. It's still in operating so not a problem by me. But you are, in the long-run, doing essentially an indirect method. That method is going to start with 100,000 and make the adjustments. The adjustment for interest is the (2000). Your way has that net, but separated into two places.

I'm saying I don't understand where the subtotal of 180,000 is coming from and calling that "cash" when the 30,000 of interest isn't cash, and it isn't an adjustment to cash. 32,000 is the actual cash (direct method) and (2000) is the adjustment (indirect). I'm not understanding the separation of 30,000 in one place and (32,000) in a different place. That is not even like the other format I've been seeing.

I would like to quote fro the relevant IAS paragraph 18. Part (b) is more relevant

18 An entity shall report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and gross
Cash payments are disclosed; or
(b) the indirect method, whereby profit or loss is adjusted for the effects of
Transactions of a non-cash nature, any deferrals or accruals of past or future
Operating cash receipts or payments, and items of income or expense
Associated with investing or financing cash flows.

When we record interest expense we record it as an accrual. As such it is adjusted and payment is shown at actual. If you need, I can send the full text for you

Thanks morgaine and rehmanvohra... I learned a thing or two already.. :)

BYW, soneeya1, just so you don't get confused over all this other detailed jibberish, the important point to you is that it's 148,000. That 48,000 of yours is a PLUS not a minus.



I will take note of that Morgaine :) Thanks..

(b) the indirect method, whereby profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense
associated with investing or financing cash flows.


That's no different. I think it's a difference in format only. So that doesn't really answer it. But never mind, don't worry about it.

The correct format is as follows:
Net income ------------ 100,000
Depreciation ----------- 50,000
Interest expense ------ 30,000
Cash generated from operations 180,000
Interest paid ----------------------- 32,000
Net cash inflow from operating activities 148,000

Caution
The answer is based on the information provided. However, it is also necessary to adjust for:
Gain or loss on disposal of assets
Changes in working capital items
Tax expense and tax paid

Thanks rehmanvohra.. =)