ACCA FR Syllabus D. Preparation Of Financial Statements - Cashflow statements - Step 1 - Notes 1 / 9
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.