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Cash Flow Statement

Cash Flow Statement

Cash Flow Statement also known as Statement of Cash Flows is a statement which shows the Changes in the Cash Position of an organisation between 2 periods. Along with showing the changes in the Cash Position of an organisation, it also depicts the reasons for such change during the period.

The main reason for the preparation of the Cash Flow Statement is that the Income Statement of an enterprise is always prepared on an Accrual Basis and it may show profits in the Income Statement but the Cash received out of these profits may be low to run the business or vice-versa.

PREPARATION OF CASH FLOW STATEMENT

Cash Flows Statement is required to be prepared using International Accounting Standard 7 (or using the Accounting Standard 3 in India). While preparing the Cash Flow Statement, the cash flows during the period are classified into 3 major categories:-

  1. Cash Flow from Operating Activities (Direct Method/ Indirect Method)
  2. Cash Flow from Investing Activities

III. Cash Flow from Financing Activities

Classification by activities provides information that allows users to assess the impact of those activities on the financial position of the enterprise. This information also helps in evaluating the inter-relationships between these activities.

Cash Flows from Operating Activities

Cash Flows from operating Activities are primarily derived from the Principal Revenue-producing activities of the enterprise.

There are 2 methods of preparing the Cash Flows from Operating Activities:-

  1. Direct Method
  2. Indirect Method

1. Cash Flow from Operating Activity- Direct Method

While preparing the Cash Flow Statement as per Direct Method, Actual Cash Receipts from Operating Revenues and Actual Cash Payments for Operating Activities are arranged and presented in the Cash Flow Statement. The difference between Cash Receipts and Cash Payments is the Net Cash Flow from Operating Activities under the Direct Method. In other words, it is a Income Statement (Profit & Loss A/c) prepared on Cash Basis under the Direct Method.

While preparing the Cash Flow Statement as per Direct Method, items like Depreciation, Amortisation of Intangible Assets, Preliminary Expenses, Debenture Discount etc are ignored from Cash Flow Statement since the Direct Method includes only Cash Transactions and Non-Cash Transactions are omitted.

Likewise, no adjustment is made for Loss/Gain on the Sale of Fixed Assets and Investments while preparing the Cash Flow Statement as per the Direct Method.

Format for Computation of Cash Flows from Operating Activities as per Direct Method

ParticularsAmount
Cash Receipts from Customersxxx
Cash Paid to suppliers and employees(xxx)
Cash generated from Operationsxxx
Income Tax Paid(xxx)
Cash Flow before Extra-ordinary Itemsxxx
Extra-ordinary itemsxxx
Net Cash from Operating Activities (Direct Method)xxx

2. Cash Flow from Operating Activity – Indirect Method

While preparing the Cash Flow Statement as per the Indirect Method, the Net Profit/Loss for the period is used as the base and then adjustments are made for items that affected the Income Statement but did not affect the Cash

While preparing the Cash Flow Statement as per the Indirect Method, Non Cash and Non Operating charges in the Income Statement are added back to the Net Profits while Non-Cash & Non-Operating Credits are deducted to calculate the Operating Profit before Working Capital Changes. The Indirect Method of preparation of Cash Flow Statement is a partial conversion of accrual basis profit to Cash basis profit. Further, necessary adjustments are made for Increase/Decrease in Current Assets and Current Liabilities to obtain Net Cash Flows from Operating Activities as per the Indirect Method.

Cash Flow Statement

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