Document your understanding of the Statement of Cash Flows and its preparation?

Document your understanding of the Statement of Cash Flows and its preparation?

Expert Solution

- Cash flow statement is very important document under the set of Financial Statements which are published for the Stake Holders.

- Cash Flow Statement it self clarifies that it shows the cash inflow and outflow from three types of activities and net aggregate cash inflow or outflow of the year.

- Mainly cash Flows are bifircated and analysed based on three main activity:Operating activitiy, Investing Activity, Financing Activity.

- There are two methods in preparation of Cash Flow from Operating Activity: Indirect Method and Direct Method

- In case detailed Profit and Loss account is not available then indirect method can be used where In begining Difference of Opening and Closing balance of Retained Earnings A/c are taken as Net Profit after all distributions.

In that Profit, adjustments for Non Cash Expense like depreciation shall be added, Non Operating Distributions Like Dividend shall be added back. Adjustments relating to Working Capital shall be made which may be cash inflow or outflow. Increase in Current assets will show cash outflow while decrease shows cash inflow. On other hand increase in Current Liability shows Cash inflow and decrease shows cash outflow.

- Here the objective is to Find Out Cash Operating Profit.

If detailed Profit and Loss Account is available then we can find Cash Profit directly easily.

- In Investing Activity, we shall compute the Net Outflow or Inflow by considering Sale and Purchase of Fixed assets and investments.

- In Cashflow from Financing Activity, we shall compute the inflow or outflow by considering the new long term liability and issuance of additional Shares for cash and Paying of Liability Long term or Buy Back of shares.

Aggreegate Cash inflow or outflow from all three activity shall be added to the opening cash balance, it will be equal to Closing cash balance.

ekkarill92 answered 2 years ago

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Document your understanding of the Statement of Cash Flows and its preparation?

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