• PAS 7, paragraph 18, provides that an

entity shall report cash flows fro operating

activities using either the direct method or

indirect method.

• It shows in detail or itemizes the major classes of gross

cash receipts and gross cash payments.

1) Cash collected from customers2) Interest, fees, royalties and dividends

received

3) Other operating cash receipts4) Cash paid to employees and other

suppliers of goods or services5) Interest paid6) Income tax paid

7) Other operating payments8) Contracts held for dealing or trading

purposes

Income

Statement

Accounts

Adjustments

Cash Flows from

Operating

Activities

Sales

revenue

+ Decrease in Accounts Receivable

- Increase in Accounts Receivable

+ Increase in deferred revenue

- Decrease in deferred revenue

Collection from

customers

Income

Statement

Accounts

Adjustments

Cash Flows from

Operating

Activities

Interest

revenue and

dividend

revenue

+ Decrease in Interest Receivable

- Increase in Interest Receivable

+ Amortization of premium on investment

in bonds

- Amortization of discount on investment in

bonds

Interest and

dividends collected

Income

Statement

Accounts

Adjustments Cash Flows from

Operating

Activities

Other

revenue

+ Increase in unearned revenues

- Decrease in unearned revenues

- Gains on disposals of assets and

liabilities

- Investment income (equity method)

Collection from

customers

Income

Statement

Accounts

Adjustments

Cash Flows

from

Operating

Activities

Cost of goods

sold

+ Increase in inventory

- Decrease in inventory

- Decrease in accounts payable

- Increase in accounts payable

Payments to

suppliers

Income

Statement

Accounts

Adjustments Cash Flows

from

Operating

Activities

Selling and

administrative

expenses

- Depreciation, depletion and amortization

expense

+ Decrease in accrued expenses

- Increase in accrued expenses

+ Increase in prepaid expenses

- Increase in prepaid expenses

Payments of

operating

expenses

Income

Statement

Accounts

Adjustments Cash Flows

from

Operating

Activities

Interest

expense

+ Decrease in Interest payable

- Increase in Interest payable

+ Amortization of premium on bonds payable

- Amortization of discount on bonds payable

Payments of

Interest

Income

Statement

Accounts

Adjustments Cash Flows from

Operating

Activities

Other

expense

- Losses on disposals of assets and

liabilities

- Investment loss (equity method)

Other operating

payments

Income

Statement

Accounts

Adjustments Cash Flows

from

Operating

Activities

Income tax

expense

+ Decrease in Income taxes payable

- Increase in Income taxes payable

+ Increase in deferred Income taxes payable

- Increase in deferred Income taxes payable

Payments of

income taxes

• Report amount of net cash flow by adjusting net

income to reconcile it to net cash flow from

operating activities.

• It means that the net income or loss is adjusted for the

effects of transactions of a non cash nature, any deferral

or accruals of past or future operating cash receipts and

payments and items of income or expense associated

with investing and financing activities

• Decreases in current assets Interest taxes

Plus

Increases in current liabilities Depreciation, depletion and amortization

expense

Amortization of discount on bonds payable Amortization of premium on investment in

bonds Increase in deferred income taxes Subsidiary loss under the equity method Interest expense

• Increase in current assets

Minus

Decrease in current liabilities Amortization of premium on bonds payable Amortization of discount on investment in

bonds Decrease in deferred income taxes Gain(net) on disposal of assets or liabilities Subsidiary gain under the equity method

Net Cash Flow From Operations

Equals

Interest Paid

Income taxes paid

Net Cash From Operating Activities