Difference between: Direct AND Indirect methods of Cash Flow Statement

A ‘cash flow statement’, also known as ‘statement of cash flow’, is a part of financial statements that shows how changes in Balance Sheet accounts and Income statement (P&L a/c) affect cash and cash equivalents.

A Cash flow statement is prepared to measure the company’s liquidity; the ability to pay bills and avoid defaulting on debt.

There are two methods of preparing a Cash Flow Statement viz, the direct method and the indirect method. Both the direct and the indirect method of Cash Flow Statement contains 3 sections/areas viz,

  1. Operating Activities
  2. Investing Activities
  3. Financing Activities

Key points:

  • Only difference between ‘Direct’ and ‘Indirect’ method is under ‘Operating Activities’
  • There are NO differences while reporting activities under ‘Investing Activities’ and ‘Financing Activities’ sections of both the methods.
  • Nearly all the companies/entities prepare Statement of Cash Flow using ‘indirect method’.
  • ‘Direct method’ of cash flow statement is the easier of the two. However, when there is a huge amount of data to be processed it becomes extremely tedious and therefore complicated.
  • Indirect method uses readily available information from P&L a/c and Balance Sheet. Most companies find it easier to employ.
  • Direct method shows actual amount of cash received and cash paid while indirect method starts with the Net Income amount (more correctly the profit-before-tax amount). From this amount all non-cash items (such as depreciation, amortization, provision for bad debt, accruals and loss/gain on sale of fixed assets) are removed to arrive at a final number for ‘Operating Activities’.
  • Line headings or the format of Cash Flow Statement is different for both the methods under Operating activities.
  • The final balance that you get after completing all three sections in both direct and indirect method will be/must be the same.

 

Video: Cash Flow Statement – Direct vs Indirect method

Posted in Accountancy | Tagged , , , , | Leave a comment

Calculating EOSB/End of Service Benefit or Gratuity (In the UAE)

EOSB/End of Service Benefits or Gratuity is a sum of money paid to an employee at the end of a period of employment

Calculations for Limited Contract gratuity pay in UAE

  • Less than 1 year of service : No gratuity
  • Between 1 year and 5 years of service : 21 days salary
  • 5 or more years of service :30 days salary

Example: An employee who has a BASIC SALARY of 10,000/- resigned after 2 years of work

=BASIC x 12 (months in a year) / 365 = Daily wage X 21 (days pay as per law)
=10,000 X 12 / 365 = 328.7671 x 21 = 6,904.11 (This is for one year)
= 6,904.11 x 2 (years worked) = 13,808.22 (Gratuity for 2 years of work)

 

Calculations for Unlimited Contract gratuity pay

  • Less than 1 year of service : No gratuity
  • Between 1 year and 3 years of service : One third (1/3) of the 21-days gratuity pay.
  • Between 3 years and 5 years of service: Two third (2/3) of the 21-days gratuity pay.
  • 5 or more years of service :Full 21-days gratuity pay.

Example-01: An employee who has a BASIC SALARY of 10,000/- resigned after 2 years of work

=BASIC x 12 (months in a year) / 365 = Daily wage X 21 (days pay as per law) / 3 (1/3rd of 21 day’s pay)
=10,000 X 12 / 365 = 328.7671 x 21 = 6,904.11 / 3 = 2,301.37 (This is for one year)
= 2,301.37 x 2 (years worked) = 4,602.74

Example-02: An employee who has a BASIC SALARY of 10,000/- resigned after 4 years of work

=BASIC x 12 (months in a year) / 365 = Daily wage X 21 (days pay as per law) X 2/3 (2/3rd of 21 day’s pay)
=10,000 X 12 / 365 = 328.7671 x 21 = 6,904.11 x 2/3 = 4602.74 (This is for one year)
= 4602.74 x 4 (years worked) = 18,410.96

Example-03: An employee who has a BASIC SALARY of 10,000/- resigned after 4 years & 3 months (Jan, Feb & Mar) of work

 
=BASIC x 12 (months in a year) / 365 = Daily wage X 21 (days pay as per law) X 2/3 (2/3rd of 21 day’s pay)
=10,000 X 12 / 365 = 328.7671 x 21 = 6,904.11 x 2/3 = 4602.74 (This is for one year)
= 4602.74 x 4 (years worked) = 18,410.96

Calculating for those extra 3 months worked:

= 4,602.74 (2/3 rd pay for one year’s work) / 365 = Pay Per day
= 4,602.74 / 365 = 12.61
= 12.61 x 90 days (Jan=31 + Feb=28 + Mar=31)
= 1,134.92 (for Three months worked)

Therefore, for 4 years and 3 months worked you get 18,410.96 + 1,134.92 =  19,545.88

Note

  • Gratuity pay is calculated based on the most recent salary paid into your account.
  • Gratuity is calculated based on your BASIC salary
  • If you are terminated from your job, unless you break the rules as stated in Article 139 of the Labour Law, the employee is still entitled to gratuity pay.

Click here for UAE Labour Law: end of service gratuity

–*–

Posted in Accountancy | Tagged , , | Leave a comment

Filling ‘blank/empty cells’ using data from the cell that is above the blank/empty cell

 

Steps:

1. Select the row header (select the entire colum)
2. Press F5
3. Press Alt+S or click on “Special…”
4. Select “BLANK”
5. Click OK
(Blank cells will be selected)
6. Enter ‘=’ and select the above cell
7. Press CNTRL+ENTER

If you wish to delete blank cells:

Follow Step 1 through to step 4 as mentioned above
Step 5. Right click on your mouse and select “Delete”
Step 6. Select “Shift cells up” or other options as required

If you wish to count all the blank cells:

In any cell that is outside your selection area type “=countblank(select your area)” ENTER

If you wish to colour all the blank cells:

1. Select your area
2. Select “Conditional Formatting” from the main menu
3. Select “Highlight cells rules”
4. Select ” More rules”
5. Under ‘Edit the rule description’ > ‘Format only cells with’ Choose ‘BLANKS’
6. Click on “Format”
7. Under FILL chose any colour of your choice
8. Click OK
9. Click OK again!

Posted in Excel tips | Tagged , , | Leave a comment