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Wiley IFRS: Practical Implementation Guide and Workbook
Example
$900.000
100.000
(300.000)
(200,000)
(/50.000)
( 100.000)
(/50000)
Cash Flow Statement-s-Direct Method (Operating Activities Section)
Cash flows from operating activities:
Cash collections f rom customers
Cash dividends received
Cash paid to employees
Cash paid to suppliers
Cash paidfor other operating expenses
III
come taxes paid
Interest
paid
Net cash flows from operating activities
Case Study 3
Facts
XYZ Inc. is prepari ng its cash flow statement under the direct method and has provided this information:
Net credit sales
$5,000,000
Accounts receivable, end of the year
1,500,000
Accounts receivable, beginning of the year
2,500,000
Purchases (on account)
4,000,000
Trade payable, end of the year
1,900,000
Trade payable, beginning of the year
2,000,000
Operatingexpenses
3,000,000
Accrued expenses, beginning of the year
500,000
Accruedexpenses, end of the year
400,000
Depreciation on property, plant, and equipment
600,000
$3,000,000
500000
3,500,000
(400,000)
(600 000)
$2 500 000
$4,000,000
1900 000
5,900,000
(2 000 000)
$3 900 000
$5,000,000
2500000
7,500,000
(1.500000)
$6000000
Less: Accrued expenses, end of year
Less: Depreciation on property, plant, and equipment
Cash paid toward operatingexpenses
Less: Accounts receivables, end of the year
Cash collections from customers
b. Cash paid to suppliers
Purchases
Add: Accounts payable, end of the year
Less: Accounts payable, beginningof the year
Payments to suppliers
c. Cash paid for operating expenses
Operating expenses
Add: Accrued expenses, beginning of the year
Required
For the purpose s of the cash flow statement under the direct method, you are requ ired to compute the
cash collectio ns from customers, payments to suppliers, and cash paid for operating expenses.
Solution
a. Cash collections from customers
Net sales
Add: Accounts receivables, beginning of the year
11.3
The
indirect method
is th e more popular of the two methods despite th e recommendati on by
lAS 7 to present the cash flows from operating ac tivities under the di rect method . A pos sibl e rea–
son for this cou ld be th at the indire ct method is easier to use tha n th e direct method becau se it de–
rives net cash fl ows fro m operating ac tivities from the net operating results for the year as re ported
in th e income sta teme nt. Under the indirect me tho d, the first item presented is the net income (o r
loss) for the year as reported in the income statement. Noncash items of revenue and ex pe nse are
adde d or deduct ed to arrive at net cash provide d by ope rating ac tivities. For insta nce, depreciation
on propert y, pl ant, and equipme nt is added back because these ex pe nses reduce (increase) net in–
come (lo ss) for th e year wi thout affecting cash fro m operating ac tivities. Similarl y , ga in on sa le of
property, pl ant, and equ ipment is ded uc ted fro m net income for the year because
it
does not affect
cash flow fro m opera ting ac tivities. Changes in inventory, accounts recei vabl e, and othe r operating