Procedure for preparation of Cash Flow Statement

Sources of Cash Flow Statements:

Cash flow statement is not a substitute of income statement, i.e., a profit and loss account, and a balance sheet. It provides additional information and explains the reasons for changes in cash and cash equivalents, derived from financial statements at two points of time.

A cash flow statement, also known as the statement of cash flows, is a financial statement that summarizes the amount of all cash inflows and outflows of the company.

The cash flow statement is a mandatory part of a company’s financial reports since 1987.

The Statement of Cash Flows is one of the 3 key financial statements that reports the money generated and spent throughout a particular amount of period within the organization.

The procedure for preparing a cash flow statement is different from the procedure followed in respect of profit and loss account and balance sheet. It is prepared with the help of financial statements.

The basic information required for the preparation of a cash flow statement is obtained from the following three sources:

(i) Comparative balance sheets at two points of time, i.e. in the beginning and at the end of the accounting period.

(ii) Income statement of the current accounting period or the profit and loss account.

(iii) Some selected additional data to extract the hidden transactions.

Steps for Preparation of Cash Flow Statement:

The preparation of a cash flow statement involves the following steps:

Step 1: Compute the net increase or decrease in cash and cash equivalents by making a comparison of these accounts given in the comparative balance sheets.

Step 2: Calculate the net cash flow provided (used in) operating activities by analyzing the profit and loss account, balance sheet and additional information. There are two methods of converting net income into net cash flows from operating activities: the direct method and the indirect method. These methods have been discussed separately in this chapter.

Step 3: Calculate the net cash flow from investing activities.

Step 4: Calculate the net cash flow from financing activities.

Step 5: Prepare a formal cash flow statement highlighting the net cash flow from (used in) operating, investing and financing activities separately.

Step 6: Make an aggregate of net cash flows from the three activities and ensure that the total net cash flow is equal to the net increase or decrease in cash and cash equivalents as calculated in Step 1.

Step 7: Report significant non-cash transactions that did not involve cash or cash equivalents in a separate schedule to the cash flow statement e.g., purchase of machinery against issue of share capital or redemption of debentures in exchange for share capital.

For a business organization, the cash flow statement is the foremost vital financial statement to prepare. It traces the flow of funds (or working capital) into and out of the business throughout an accounting period.

For a small business, a cash flow statement ought to be in all probability to be ready as often as possible.

Three Sections of a Statement of Cash Flows:

1. Cash from operating activities,
2. Cash from investing activities,
3. Cash from financing activities.

Cash from operating activities

Cash Flow from Operations usually includes the money flows related to sales, purchases, and other expenses. In other words, it reflects how a lot of money is generated from a company’s products or services.

These operating activities include Receipts from sales of product and services, Interest payments, Income tax payments, Payments made to suppliers of product and services, Salary and wage, Rent payments etc.

Cash from investing activities

Cash Flow from investment Activities includes the cash flows related to buying or selling property, plant, and equipment, other non-current assets, and other financial assets.

Usually, cash flow from investment activities is a “cash out” item, because money is used to spend for new instrumentation, buildings, or short-term assets such as marketable securities.

Cash from financing activities

Cash flows from financing activities generally include cash flows associated with borrowing and repaying bank loans, and issuing and buying back shares.

The payment of a dividend is also treated as a finance income. If a company issues a bond to the general public, the company receives cash financing; but, when interest is paid to bondholders, the company is reducing its cash.

Here is an example of statement of cash flow:

Cash Flow Statement	Rs.
Operating Cash Flow Net Earning Plus: Depreciation and Amortization Less: Changes in Working Capital	15,474 19,500 9,003
Cash from Operations   Investing cash flow Investment in Property & Machines	25,971     (15,000)
Cash from Investing Financing cash Flow Issuance of Debt Issuance of Equity	(15,000)   (8,000) 1,70,000
Cash from Financing   Net increase/Decrease  in Cash Opening cash Balance	1,62,000   1,72,971 11,000
Closing Cash Balance	1,83,971

Importance of Cash Flow Statement:

It is equally as important as like as the profit-and-loss statement and balance sheet for cash flow analysis.

Without a cash flow statement, it may be tough to have a correct image of a company’s performance.

The income statement can tell you the way a lot of interest you paid on a loan and therefore the record can tell you the way a lot of you owe, but solely the cash flow statement can tell you the way a lot of money was consumed servicing that loan.

The income statement can record sales and profits however it’s the income statement that may provide you with a warning if those sales aren’t generating enough money to cover expenses.