Indirect Method: Dividends, Interest, Bank Overdraft, and Taxes Paid

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Hi - I have been looking for an answer to this for a while, but couldn’t find anything definitive. I would really appreciate it if someone could confirm the relationship. Thank you!!!!
Under the indirect method, we have the following (I’m assuming the effect is same for GAAP and IFRS)
GAAP Shock: An Increase in ….
Dividends Paid CFF Decrease CFF
Dividends Received CFO Increase CFO
Interest Paid CFO Decrease CFO
Interest Received CFO Increase CFO
Bank Overdraft CFF Decrease CFF ???
Taxes Paid CFO Decrease CFO
**I’ve seen people both deduct and add Dividends Received for CFO, so now I’m beyond confused ….
***Or could it be that these are only for the direct method, and are not applicable for the indirect method … ?
 
GAAP IFRS Shock: An Increase in ….
Dividends Paid CFF CFO/CFF Decrease CFF or CFO (IFRS)
Dividends Received CFO CFO/CFI Increase CFO or CFI (IFRS)
Interest Paid CFO CFO/CFF Decrease CFO or CFF (IFRS)
Interest Received CFO CFO/CFI Increase CFO or CFI (IFRS)
Bank Overdraft CFF Part of cash Decrease CFF if repaid/Increase CFF if drafted (USGAAP)
Decrease cash & equivalents if repaid or increase same position if drafted (IFRS)
Taxes Paid CFO CFO CFO/CFF/CFI Decrease CFO (USGAAP) Decrease CFO or CFF or CFI (IFRS)
 
Thank you Flashback!!!!!!!!!!!
Just to further clarify, we use this relationship for both the direct and indirect methods right?
 
This rule applies on IM
Indirect method - start with NI, then make NCC adjustments and you may follow this recommendation: use the simple rule: each asset increase = cash flow decrease and vice versa; each liability/equity item increase = cash flow increase and vice versa
Direct method: CF inflows/outflows are linked to its sources:
Eg.
Cash received from clients
Cash paid to vendors etc…
…
Cash received from interest
Paid interest…
 
One more question - we shouldn’t deduct Taxes & Interest paid from Net Income again, since it’s already been deducted from EBIT to form NI, right?
 
By Indirect method you have to adjust net income (which is often just accounting term) for all non cash charges.
Then, to get cash balance at the end of the period and increase/decrease of cash flow by each class you have to proceed with recording changes on CF upon each activity within certain CF class (eg. increase of short term liabilities to suppliers, decrease of inventory, cash inflows upon received interest, dividends etc…).
Since, if are interest paid or collected within period or taxes paid or was utilized tax receivable with impact on CF, it should be recorded in CF statement within period upon certain CF category.
 
Okay, I think I am getting the hang of it. The reason why I asked was because in one of Schweser’s questions, they gave:
“Assuming U.S. GAAP, use the following data to answer:
Net Income = $45
Depreciation = $75
Taxes Paid = $25
Interest Paid = $5
Profit on Sale of Building = $20
Cash Received from Sale of Company Building = $40
Cash flow from operations is:
A) $70
B) $100
C) $120
Answer: Net Income - Profit on Sale of Building + Depreciation = $100. Note that taxes and interest are already deducted in calculating net income, and that the profit on the sale of the building should be subtracted from net income”
To summarize, am I right in assuming:
Taxes & Interest PAID is not adjusted, while Taxes & Interest PAYABLE & RECEIVABLE is adjusted?
Again, I really appreciate this. I’ve spent way too much time trying to figure this out. Thank you.
 
Taxes and interest payable and receivable are BS records.
Taxes paid and interest paid in example above are P/L items and hence contained in NI.
Simple Example of CF statements by Indirect method (may apply under both USGAAP and IFRS):
1. In same period your company paid and expensed $50 interest (P/L expense) and accrued (not paid) another +$100 interest (account payable - BS item)
2. Your earnings before tax is $1000 (EBT)
3. Corp. inc. tax is 20 % (P/L expense)
4. You had corp. inc. tax credit of -$50 utilization (account receivable decrease, BS item) during year
5. depreciation expense was $20
CF
EBT $1000
- TAX $ 200
NI $800
Depr. + $20
________
NI after adjustments
= $820
Decrease in tax receivables + $50
Increase in interest payables + $100
_________
Cash flow from operations
= $970
Comments
Your corporate income current tax expense (P/L item) was contained in NI amount. By applying IM you made all BS adjustments to get CFO and after calculating CFF and CFI to get the ending cash balance.
Tax receivable record was utilized and thus converted to cash (reduced tax outflow).
Increase in accrued interest payable was not created cash outflow but increase in AP improved cash conversion cycle.
 
Your explanation is PERFECT. I can’t thank you enough. I’ve read ~5 resources for this topic several times and only you’ve made me understand!
 
Give yourself a chance. I am pretty sure that you’ll master it till level 3.:)
 
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