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Cash flow statement methods - additions and deductions The...

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Direct method The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities. Indirect method The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted for net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of
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Unformatted text preview: additions and deductions. The following rules are used to make adjustments for changes in current assets and liabilities, operating items not providing or using cash and nonoperating items. • Decrease in non-cash current assets are added to net income • Increase in non-cash current asset are subtracted from net income • Increase in current liabilities are added to net income • Decrease in current liabilities are subtracted from net income • Expenses with no cash outflows are added back to net income (depreciation and/or amortization expense are the only operating items that have no effect on cash flows in the period) • Revenues with no cash inflows are subtracted from net income • Non operating losses are added back to net income • Non operating gains are subtracted from net income...
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