Cashflow statement - Step 3

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Cash Flow Statements - Step 3

So far we have got the cash (indirectly) from operating profit. This means we have the cash from Sales, COS, admin and distribution costs.

What we now do is look at what’s left in the income statement and try to find the cash.

So we are looking at the other parts of the income statement (after operating profit) and finding the cash and putting this directly into the cash-flow statement.

Direct method

We do this by using a different method to the one in step 2 as we are now looking to put the cash in directly to the cash-flow statement (rather than taking a profit figure and adding back the non-cash items to indirectly arrive at cash).

So how do we do this?

General Method Explanation

Let’s say you owed somebody 100, then bought 20 more in the year - you should therefore owe them 120 right?

However you look at your books at the year end and you see you only owe them 70

Therefore, you must have paid cash to them of 50 - this is the figure we then put in our cash-flow statement.

To show this differently (and how the examiner often shows it):

Opening Payable (from SFP) 100
Income statement figure for year 20
Cash paid (balancing figure) (50)
Closing Payable (from SFP) 70

We use this format for the rest of the cashflow question - though it may need adjusting slightly
(PPE is calculated differently).

We will now go on to look at the different items that you may find in the income statement and how we deal with them in the cash-flow statement using this method.

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