CASH FLOW STATEMENT

What is Cash Flow statement in Accounting ? Introduction and Basic Concept

What is cash flow statement

Cash Flow Statement It contains three words Cash, flow, and statement.

It is prepared for Accounting standard AS -3(revised)

Cash means cash and cash equivalent. It means bank balance which is equal to cash. Marketable security (it can sell any time)

Three types of cash are 

  • Cash
  • Cash at Bank
  • Marketable security 

Flow means which is changing in the cash flow statement. So we have to find change in the cash.

Machinery value Rs. 100,000 last year now value Rs 150,000.

This means the flow of cash is 50,000.

The statement means is the documents.

The cash flow statement is the change in cash in two years.

Flow can increase the cash or decrease the cash we need to note both of them .

There are two method of preparing cash flow statement.

  • Direct Method
  • Indirect Method

Cash flow statements are prepared in three parts.

  1. Cash flow from Operating Activities
  2. Cash flow from investing activities
  3. Cash flow from Financial Activities

Format of cash flow Statement (Direct method)

ParticularAmountAmount  
(A) Cash flow from operating Activities
Sale(+)
Cost of Goods sold(-)
All day to day expense Business expenses(-)
(b)Cash flow from Investing Activities
Purchase of Fixed Assets and Investment(-)
Sale of Fixed Assets and Investment(+)
Interest on Investment (+)
Interest on Investment(+)
Rent Received(+)
(C) Cash Flow from Financial Activities
Issue of Share and Debenture(+)
Loan(+)
Redemption of Preference share and debenture(-)
Loan payment(-)
Interest on Loan *(-)
Dividend paid on share*(-)

The Structure of the Cash Flow Statement
The main components of the cash flow statement are:

  • Cash from operating activities
All activities that are related to the operation of a business such as sales, cash paid to creditors, cash received from debtors, etc.
 
 
  • Cash from investing activities
Example : 
Fixed Assets and Investment
  • Cash from financing activities.

Example: the issue of share or loan.

Calculation of Net profit before Tax:

  1. Current year profit – previous year’s profit.

Calculation of Net profit before Tax:

Add

+transfer to reserver 

+Proposed dividend

+Interim dividend

+Provision for tax

Minus 

+Refund of tax

Adjustment related to assets 

  1. Prepare Assets Accounts
  2.  

 

What is the use of a Cash flow statement?

The Cashflow Statement allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The Cash Flow Statement is important since it helps investors determine whether a company is on a solid financial footing.

 

Cash flow statement indirect method

ParticularAmountAmount  
(A) Cash flow from operating Activities(…)
NP before tax and extraordinary items(…)
Adjustments for depreciation (…)
Miscellaneous expenses written off(…)
Loss on sale of Fixed Assets(…)
Profit on sale of fixed assets(…)
Interest expense(…)
Dividends Income(…)
Operating Profit before working capital change(…)
Purchase of Fixed Assets and Investment(…)
Add decrease in current assets
Increase in Current Liabilities
(…)
LESS : Increase in Current Assets
Decrease in Current Liabilities
(…)
Cash Generated from operating activities(…)
Direct tax or Income tax paid(…)
Cash Flow before Exraordinary items
+ or minus
(…)
(…)
(…)
(B)Cash Flow from used in Investing activities(…)
Purchase of Fixed Assets(…)
sale of Fixed Assets(…)
Purchase of long term Investment(…)
Sale from long term Investment(…)
Interest Received(…)
Dividend Received(…)
(…)
Net Cash from used in Investing activities(…)
Cash Flow From used in Financing Activities(…)
Process from Issue of Share capital(…)
Process from long term borrowing(…)
Repaying of long term borrowing(…)
Interest paid(…)
Dividend Paid(…)
Net Cash from used in financing activities(…)
Net increase or decrease in cash and cash equivalents(…)
ADD cash and cash equivalents : Closing Balance(…)
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