Source of Cash Inflow

Cash from operations

Cash from operations is a major source of cash flow into the business.  Only Cash Sales and Cash Receipts from debtors against credit sales are recognized as a source of cash.  Similarly Cash Purchases and Cash Payments to suppliers for credit purchases are regarded as the use of cash.  In respect of other expenses and incomes also, no consideration is given for outstanding and prepaid expenses and incomes.

Cash from operations may be calculated in two ways i.e. Cash Sales Method or Net Profit Method.

Cash Sales Method

Under this method, cash from operations is ascertained as under:

Cash from operations = Cash Sales – Cash purchases and Cash Operating Expenses.

Generally, the income statement shows both cash and non-cash items. In order to ascertain cash sales, cash purchases and cash operating expenses based on income statement, the items of Current assets and current liabilities given in the balance sheet should also be taken into account along with items of income and expenditure shown in the income statement. This method is also known as ‘Income & Expenditure’ method. Let us know how to ascertain cash sales, cash purchases and cash operating expenses and cash from operations under this method.

(i)	Cash Sales:	Rs
	Total Sales
	Less: Debtors / BIR at the end
	Add: Debtor/B/R at the beginning
	Cash Sales
	Alternatively,
	Total Sales
	Less: Increase in Debtors or BIR
	Add: Decrease in Debtors or Bills
	Receivable
	Cash Sales

(ii)	Cash Purchases:
	Total purchases
	Add: Creditors & BIP at the end
	Less: Creditors & BIP at the beginning
	Cash Purchases
	Alternatively,
	Total purchases
	Less: Increase in creditors and Bills
	payable
	Add Decrease in Creditors and BIP
	Cash Purchases

Note: Sales made by every firm represent both cash sales and credit sales. On account of credit sales made during the year, the question of collecting debts from debtors arises. As such, that portion of credit sales which remained uncollected at the end of accounting year is termed as ‘Debtor or Bills Receivable’ and is shown as asset in the Balance Sheet. Hence, the increase in the amount book-debts or debtors and bills receivable is considered as an increase in credit sales and deducted from total sales and decrease in the amount from debtors and bills receivable is added back. However, the collections made from debtors and cash received against bills receivable would be shown as inflow of cash in the cash flow statement.

Similarly, the purchases made by every firm represent both cash and credit purchases. On account of credit purchases made during the accounting year, the question of payment to creditors arises. As such, that portion of credit purchases which remained unpaid at the end of accounting year is termed as creditors and bills payable shown as liability in the Balance Sheet. Hence, increase in creditors and B/P is considered as increase in credit purchases and deducted from total purchases and decrease in amount of credits and bills payable is added back. However, payments made to creditors or cash paid against bills payable should be shown as outflow of cash in the cash flow statements.

Rs

(Hi) Cash Operating Expenses

Total operating expenses for the                                 xxxx

accounting year

Less: Non-cash items                                      xxxx

Increase in O/s expenses                                 xx

Decrease in prepaid expenses                         xxx       xxx

xxxx

Add: Decrease in O/s expenses                       xxx

Increase in pre-paid expenses                          xxx       xxx

Cash Operating Expenses                                           xxxx