Cashflow statements - Step 1

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Cash Flow Statements - Step 1

Indirect method

The idea here is simply to get to the profit from operating activities as a starting point - nothing more!

So IAS tells us that although we need to get to the operating profit figure we must start with Profit before tax (PBT) and reconcile this to the operating profit figure.

Operating Profit

Before we do this let’s remind ourselves what “Operating profit” is.

Operating Profit is:

Sales x
COS (x)
Administration expenses (x)
Distribution costs (x)

Illustration

Sales 1,000
COS (400)
Administration expenses (100)
Income from Investment property 180
Distribution costs (100)
Finance costs (80)
Profit before tax 500
Tax (50)

Start with the profit before tax figure and then reconcile to the operating profit figure.

Operating profit would be:

Sales 1,000
COS (400)
Administration expenses (100)
Distribution costs (100)
Operating Profit 400

So, let’s start reconciling…

PBT 500
  -
Operating Profit 400

Then fill in the reconciling figures between them (income is a negative and expense a positive here). This is because we are going upwards on the income statement, rather than the normal downwards.

So this is the final answer to step 1:

PBT 500
Income from Investment Property -(180)
Finance Costs 80
Operating Profit 400

You place this in the “Cashflow from Operating Activities” part of the cash-flow statement.

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