Question

Describe the procedure to prepare Cash Flow Statement.

Answer 1

The procedure to prepare Cash Flow Statement is described in the following steps in their chronological order.

Step 1: Ascertain the cash flows from operating activities

Step 2: Ascertain the cash flows from investing activities

Step 3: Ascertain the cash flows from financing activities

Step 4: Ascertain net increase or decrease by summing up the amounts of Steps 1, 2, and 3.

Step 5: Write the opening balance of cash and cash equivalents and deduct it from the amount ascertained in Step 4. The resulting figure arrived is the Closing Balance of Cash and Cash Equivalents.

There are two methods viz. Direct Method and Indirect Method for the preparation of Cash Flow Statement.

Direct Method Cash Flow Statement
	Particulars		Amount Rs	Amount Rs
A.	Cash Flow from Operating Activities
	Cash Sales		**
	Cash receipt from Debtors		**
		Less: Cash Purchases	**
		Cash paid to creditors and other expenses	**
		Cash Generated from Operating Activities	**
		Less: Income Tax Paid	**
		Cash flow before Extraordinary Items	**
		Add/Less: Extraordinary Items	**
		Net Cash Flow from (used in) Operating Activities	**	**
B.	Cash Flow from Investing Activities		**
	Sale of Fixed Assets		**
	Sale of long-term Investments		**
	Interest Received		**
	Dividend Received		**
	Rent Received		**
		Less: Purchase of Fixed Assets	**
		Less: Purchase of long-term Investment	**
	Net Cash Flow from Investing Activities		**	**
C.	Cash Flow from Financing Activities
	Proceeds from Issue of Shares		**
	Proceeds from Issue of Debentures and Other Long-term Borrowings		**
		Less: Repayment of Debentures and Other Long-term Borrowings	**
		Less: Redemption of Preference Shares	**
		Less: Interest Paid	**
		Less: Dividend Paid	**
	Net Cash flow from Financing Activities		**	**
	Net Increase (or Decrease in Cash and Cash Equivalents (A+B+C)			**
	Cash and Cash Equivalents at the beginning (Cash in Hand, Cash at Bank, Marketable Securities, Short-term Deposits)			**
	Cash and Cash Equivalent at the end			**

Indirect Method
Cash Flow Statement
	Particulars				Amount Rs	Amount Rs
A.	Cash Flow from Operating Activities:
	Net Profit before tax and extraordinary items					***
		Add: Non-Cash Expenses and non operating expenses.
				Depreciation	**
				Goodwill	**
				Interest paid	**
				Loss on sale of fixed assets	**	**
		Less:		Non-Operating Incomes.
				Dividend received	**
				Profit on sale of fixed assets	**
				Interest received	**	**
	Operating Profit before Working Capital Changes					***
		Add: Decrease in Current Assets			***
				Increase in Current Liabilities	**	***
		Less: Increase in Current Assets			***
			Decrease in Current Liabilities		***	***
	Cash generated from Operating Activities					***
	Less: Income tax paid					***
	Cash flow before Extra ordinary items					***
		Add/Less: Extra ordinary items				***
	Net Cash Flow from Operating Activities					***
B.	Cash Flow from Investing Activities				**
	Sale of Fixed Assets				**
	Sale of Long-term Investments				**
	Interest Received				**
	Dividend Received				**
	Rent Received				**
		Less: Purchase of Fixed Assets			**
		Less: Purchase of long term Investment			**
	Net Cash Flow from Investing Activities				**	**
C.	Cash Flow from Financing Activities
	Proceeds from Issue of shares				**
	Proceeds from Issue of Debentures and other Long-term Borrowings				**
		Less: Repayment of Debentures and other Long-term Borrowings			**
		Less: Redemption of preference Share			**
		Less: Interest paid			**
		Less: Dividend paid			**
	Net Cash Flow from Financing Activities				**	**
	Net Increase (or Decrease in Cash and Cash Equivalents (A+B+C)					**
	Cash and Cash Equivalents at the beginning (Cash in Hand, Cash at Bank, Marketable Securities, Short-term Deposits)					**
	Cash and Cash Equivalents at the end					**

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.