Question

Describe the procedure to prepare cash flow statement.

Answer 1

The procedure for preparing cash flow statement is as follows

Step 1 First of all cash flows from operating activities is ascertain.

Step 2 After that cash flows from investing activities is ascertain.

Step 3 The third step is to ascertain the cash flows from financing activities.

Step 4 Sum up the total of all the three steps and ascertain net increase or decrease.

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. The main difference in direct and indirect method is to calculate the cash flow from operating activities. Computation of rest of the two activities will remain same. Here are the Proforma of cash flow statement from both the methods.

Direct Method
Cash Flow Statement
$\begin{array}{cccc}& \text{Particulars}& \text{Amt. (Rs)}& \text{Amt. (Rs)}\\ \text{A.}& \text{Cash Flow from Operating Activities}& & \\ & \text{Cash Sales}& -& \\ & \text{Cash Receipt from Debtors}& -& \\ & \text{(-) Cash Purchase}& -& \\ & \text{Cash Paid to Creditors and Other Expenses}& -& \\ & \text{Cash Generated from Operating Activities}& -& \\ & \text{(-) Income Tax Paid}& -& \\ & \text{Cash Flow before Extraordinary items}& -& \\ & \text{(+)/ (-) Extraordinary items}& -& \\ & \text{Net Cash Flow from (used in) Operating Activities}& -& -\\ \text{B.}& \text{Cash Flow from Investing Activities}& -& \\ & \text{Sale of Fixed Assets}& -& \\ & \text{Sale of Long Term Investments}& -& \\ & \text{Interest Received}& -& \\ & \text{Dividend Received}& -& \\ & \text{Rent Received}& -& \\ & \text{(-) Purchase of Fixed Assets}& -& \\ & \text{(-) Purchase of Long Term Investment}& -& \\ & \text{Net Cash Flow from Investing Activities}& -& -\\ \text{C.}& \text{Cash Flow from Financing Activities}& & \\ & \text{Proceeds from Issue of Shares}& -& \\ & \text{Proceeds from Issue of Debentures and Other Long Term Borrowings}& -& \\ & \text{(-) Repayment of Debentures and Other Long Term Borrowings}& -& \\ & \text{(-) Redemption of Preference Shares}& -& \\ & \text{(-) Interest Paid}& -& \\ & \text{(-) Dividend Paid}& -& \\ & \text{Net Cash flow from Financing Activities}& -& -\\ & \text{Net Increase or Decrease in Cash and Cash Equivalents (A + B + C)}& & -\\ & \text{(+) Cash and Cash Equivalents at the Beginning (Cash in Hand,}& & -\\ & \text{Cash at Bank, Marketable Securities, Short Term Deposits)}& & \underset{–}{}\\ & \text{Cash and Cash Equivalents at the End}& & \underset{–}{-}\end{array}$

Indirect Method
Cash Flow Statement
$\begin{array}{cccc}& \text{Particulars}& \text{Amt. (Rs.)}& \text{Amt. (Rs.)}\\ \text{A.}& \text{Cash Flow from Operating Activities:}& & \\ & \text{Net Profit before Tax and Extraordinary items}& & -\\ & \text{Adjustment for non-cash items:}& & \\ & \text{Depreciation}& -& \\ & \text{Adjustment for non-operating items:}& & \\ & \text{Interest Paid}& -& \\ & \text{Loss on Sale of Fixed Assets}& -& \\ & \text{(-) Dividend Received}& -& \\ & \text{(-) Profit on Sale of Fixed Assets}& -& \\ & \text{(-) Interest Received}& \underset{–}{-}& \\ & \text{Operating Profit before Working Capital Changes}& -& \\ & \text{Changes in Working Capital:}& & \\ & \text{(+) Decrease in Current Assets}& -& \\ & \text{Increase in Current Liabilities}& -& \\ & \text{(-) Increase in Current Assets}& -& \\ & \text{Decrease in Current Liabilities}& -& \\ & \text{Cash Generated from Operating Activities}& -& \\ & \text{(-) Income Tax Paid}& -& \\ & \text{Cash flow before Extraordinary items}& -& \\ & \text{(+)/ (-) Extra ordinary items}& \underset{–}{-}& \\ & \text{Net Cash Flow from Operating Activities}& & -\\ \text{B.}& \text{Cash Flow from Investing Activities}& & \\ & \text{Sale of Fixed Assets}& -& \\ & \text{Sale of Long Term Investments}& -& \\ & \text{Interest Received}& -& \\ & \text{Dividend Received}& -& \\ & \text{Rent Received}& -& \\ & \text{(-) Purchase of Fixed Assets}& -& \\ & \text{(-) Purchase of Long Term Investment}& \underset{–}{-}& \\ & \text{Net Cash Flow from Investing Activities}& & -\\ \text{C.}& \text{Cash Flow from Financing Activities:}& & \\ & \text{Proceeds from Issue of Shares}& -& \\ & \text{Proceeds from Issue of Debentures and Other Long Term}& -& \\ & \text{Borrowings}& & \\ & \text{(-) Repayment of Debentures and Other Long Term}& -& \\ & \text{Borrowings}& & \\ & \text{(-) Redemption of Preference Share}& -& \\ & \text{(-) Interest Paid}& -& \\ & \text{(-) Dividend Paid}& \underset{–}{-}& \\ & \text{Net Cash Flow from Financing Activities}& & -\\ & \text{Net Increase or Decrease in Cash and Cash Equivalents (A + B + C)}& & -\\ & \text{(+) Cash and Cash Equivalents at the Beginning (Cash in Hand,}& & -\\ & \text{Cash at Bank, Marketable Securities, Short Term Deposits)}& & \underset{–}{}\\ & \text{Cash and Cash Equivalents at the End}& & \underset{–}{-}\end{array}$