Question -
Answer -
In indirect method cash flow statement begins with net income or loss, and thereafter the additions or deductions from that amount for non-cash expense and revenue items, which results in cash flow from operating activities. Following are some items:
1. Items that are non-cash in nature like goodwill, depreciation are added towards net profit
2. Expenses that are non-operating in nature like transfer to reserve and loss on sale of fixed assets which are added back to show Net Profit earned.
3. Provision such as discount for debtors, doubtful debts, proposed dividends etc. should be added to Net Profit
4. Any decrease in current assets and an increase in current liabilities is added to operating profit.
Following items get deducted from net profit of P & L account
1. Incomes that are non-operating in nature like sale of fixed assets
2. Non-trading incomes like dividend received, tax refund, interest received
3. Increase in current assets and decrease in current liabilities