Question

Explain the purpose of the Statement of Cash Flows and describe the information that it contains. Also indicate which financial statement(s), if any, should be prepared before the Statement of Cash Flows.

Answer 1

THE PURPOSE OF CASH FLOW STATEMENT IS TO CHECK THE LIQUIDITY OF AN ENTITY. THE PURPOSE OF STATEMENT OF CASH FLOW IS TO CHECK ACTUAL INCOME AND EXPENSES IN CASH. THE PURPOSE OF CASH FLOW STATEMENT IS TO PROVIDE INFORMATION ABOUT A ENTITY'S GROSS RECEIPT AND GROSS PAYMENT FOR A SPECIFIED PERIOD OF TIME.

THE GROSS RECEIPT AND PAYMENT WILL BE REPORTED IN THE CASH FLOW STATEMENT ACCORDING TO ONE OF THE FOLLOWING CLASSIFICATION:

1. OPERATING ACTIVITIES,

2. INVESTING ACTIVITIES,

3. FINANCING ACTIVITIES.

THE NET CHANGE FROM THESE THREE CLASSIFICATIONS SHOULD EQUAL THE CHANGE IN A COMPANY'S CASH & CASH EQUIVALENTS DURING THE REPORTING PERIOD.

THE CASH FLOW STATEMENT IS PREPARED FOR A PERIOD FOR WHICH BALANCE SHEET AND STATEMENT OF PROFIT & LOSS/ INCOME STATEMENT IS PREPARED.

THE CASH FLOW STATEMENT ALSO HELPS IN COMPARISON WITH OTHER ENTITY LIQUIDITY/ INDUSTRY LIQUIDITY.

CASH FLOW STATEMENT CAN BE PREPARED BY DIRECT METHOD & INDIRECT METHOD.

FORMAT OF CASH FLOW STATEMENT: BY DIRECT METHOD:-

PARTICULARS	AMOUNT	AMOUNT
1. CASH FLOW FROM OPERATING ACTIVITIES
CASH SALES	xxx
COLLECTION FROM DEBTORS	xxx
CASH PURCHASE	(xxx)
PAYMENT TO SUPPLIERS	(xxx)
WAGES PAID	(xxx)
ADMINISTRATIVE EXPENSES PAID	(xxx)
INCOME TAX PAID	(xxx)
NET CASH FLOW FROM OPERATING ACTIVITIES		xxx
2. INVESTING ACTIVITIES
SALE PROCEED FROM PROPERTY/ INVESTMENT	xxx
COLLECTION OF LOAN	xxx
DIVIDEND RECEIVED	xxx
INTEREST RECEIVED	xxx
PURCHASE OF PROPERTY/ INVESTMENT	(xxx)
LOAN GIVEN	(xxx)
NET CASH FLOW FROM INVESTING ACTIVITIES		xxx
3. FINANCING ACTIVITIES
ISSUES OF EQUITY, PREFERENCE SHARES	xxx
BORROWING: DEBENTURE, LOAN	xxx
REDEMPTION OF PREFERENCE, DEBENTURE	(xxx)
BUY BACK OF SHARE	(xxx)
DIVIDEND ISSUED	(xxx)
INTEREST PAYMENT	(xxx)
NET CASH FLOW FROM FINANCING ACTIVITIES		xxx
NET CASH GENERATED FROM ACTIVITIES (1+2+3)		xxx
ADD: OPENING CASH & CASH EQUIVALENT		xxx
CLOSING CASH & CASH EQUIVALENT		xxx

THE CASH FLOW STATEMENT IS PREPARED AFTER PREPARATION OF BALANCE SHEET & STATEMENT OF PROFIT & LOSS.