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.
- Cash flow from Operating Activities
- Cash flow from investing activities
- Cash flow from Financial Activities
Format of cash flow Statement (Direct method)
The Structure of the Cash Flow Statement
The main components of the cash flow statement are:
- Cash from operating activities
- Cash from investing activities
- Cash from financing activities.
Example: the issue of share or loan.
Calculation of Net profit before Tax:
- 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
- Prepare Assets Accounts
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.