Question

Identify and explain the major steps involved in preparing the statement of cash flows.

Answer 1

Steps involved in preparation of cash flow statement :-

Step 1 :- prepare the operating activities section by converting net income from an accrual basis to a cash basis

This step can be done following two methods

Direct method and indirect method

Mostly all the companies follows indirect method

Indirect method starts with net income from income statement and make several adjustments relating to the current assets, current liabilities and other items to arrive at cash provided by operating activities. Cash provided by operating activities represent net income on a cash basis. it tells the user of financial statements how much of money generated by daily operations of the business.

Step 2 :- prepare the investing activities section by presenting cash activity for non current assets

This step focuses on the effect changes in non current assets have on cash. Non current assets balances found on balance sheet, coupled with other information are used to perform this step.

Step 3 :- prepare the financing activities section by presenting cash activity for non current liabilities and owner's equity.

This step focuses on the effect changes on non current assets and owners equity have on cash. Non current liabilities and owner's equity balances found on balance sheet.

Step 4 :- reconcile the change in cash

Each section of statement of cashflows described in step 1, step 2 and step 3 will show the total cash provided by or used by the activity. Step 4 simply confirm the net of these effects equates to the change in cash on balancesheet.

These are all the steps followed in preparation of cash flow statement.

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