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Cash Flow Statement ( Indirect Method ) AS 3 | Class 12th | CA Intermediate | Accounts Video Lecture - B Com

FAQs on Cash Flow Statement ( Indirect Method ) AS 3 - Class 12th - CA Intermediate - Accounts Video Lecture - B Com

1. What is the indirect method of preparing a cash flow statement?

Ans. The indirect method of preparing a cash flow statement starts with the net profit or loss from the income statement and adjusts it for non-cash items, changes in working capital, and other operating activities to arrive at the operating cash flow. It focuses on reconciling the differences between net income and cash flow from operating activities.

2. What is the purpose of preparing a cash flow statement using the indirect method?

Ans. The purpose of preparing a cash flow statement using the indirect method is to provide information about the cash inflows and outflows from operating, investing, and financing activities. It helps in assessing the liquidity, solvency, and financial performance of a company by showing the sources and uses of cash during a specific period.

3. What are the advantages of using the indirect method for preparing a cash flow statement?

Ans. The advantages of using the indirect method for preparing a cash flow statement are: 1. Simplicity: The indirect method is relatively easier to understand and apply compared to the direct method. 2. Less data required: The indirect method requires less detailed information and data compared to the direct method. 3. Relevance to stakeholders: The indirect method provides valuable insights into the operating cash flow and helps stakeholders understand the underlying reasons for changes in cash position.

4. How does the indirect method adjust net profit for non-cash items?

Ans. The indirect method adjusts net profit for non-cash items by adding back non-cash expenses (e.g., depreciation, amortization) and deducting non-cash incomes (e.g., gain on sale of assets). These adjustments are made to reflect the actual cash flows related to these items, as they do not involve cash transactions.

5. Can you explain the concept of changes in working capital in the indirect method of preparing a cash flow statement?

Ans. In the indirect method, changes in working capital are included in the operating activities section of the cash flow statement. It involves analyzing the changes in current assets (e.g., accounts receivable, inventory) and current liabilities (e.g., accounts payable, accrued expenses) between two accounting periods. Positive changes in working capital result in a decrease in cash flow from operating activities, while negative changes indicate an increase in cash flow. This adjustment helps in determining the actual cash inflows and outflows related to working capital management.

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	Nov 15, 2024 Last updated

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