Question

How is the statement of cash flows prepared? What information is used when preparing the statement of cash flows? Cite any references used. Participate in follow-up discussion by reviewing your classmates' posts, adding additional information, asking questions, or responding to follow-up questions posed by your instructor.

Answer 1

Disclaimer - The question demands discussions with class mates and Instructor and doesnot specify the scope. Hence the answer is based on Generally accepted Accounting Prinicpal.

Please feel free to add on if any thing else is left out.

Cash Flow statement is one of the most important Financial report which helps the stakeholders understand the functioning of the organization specially from cash point of view as they say " Cash is King".

Profit and Loss statement is based on accrual concept and sometimes it can be mis-represented also. For instance during the 2008 financial crisis, the banks kept booking Interest Income from Non-Performing Assets (NPAs) on accrual basis. Incentive might have been to show higher profits and also the bonuses were linked to Profits.

However, Cash Flow statements give a clearer picture of the cash position in the organization for the certain specific period and classifying it broadly into 3 categories which we will be discussing shortly.

Some Important Points:

1.Cash & cash equivalent: This includes cash in hand ,cash at bank, short term advances, short term deposits, short term investments, which will mature within 3 months from the date of their acquisition.

2.Items of cash flow statements are classified under the following 3 activities:

            a)Operating Activities

            b)Investing Activities

            C)Financing Activities

4.Operating items are items related to principal revenue producing activities and all those items which are not investing or financing item.

5.Investing items are items related to acquisition and disposal of Fixed assets and other investments.

6. Financing items are items which changes the capital structure including pref. shares and borrowings.

7.Sometimes a single payment may include more than one activity, we have to do the segregation work.

8. Sometimes, capital structure and asset structure may change in a big way but cash inflow and cash outflow does not arise. Example, bonus, conversion of debt into equity, demerger, amalgamation, shares issued for business acquisition.

Cash from operating activities can be computed by using either of the two methods:

1)Direct Method

Under Direct method, we disclose the following items straight away:

1. Collection from debtors
2. Cash sales
3. Cash purchases
4. Payment to creditors
5. Payment for expenses
6. Foreign exchange gain realized

2) Indirect Method

Under this method, we convert the PBT and extra ordinary items into cash from operations by adjusting the following:

1. Non Cash items
2. Investing & financing items(Interest, profit/loss I sale of investments/FA, etc)
3. Working capital changes other than cash and cash equivalent

*Note: If foreign exchange fluctuation gains in realized, then it is not to be adjusted in Profits since it is treated as a ordinary and operating item. However if it is unrealized, then eliminate it from profits or add if loss, and also from closing debtors.

Cash Flow Format

Format of Cash Flow Statement for the year ended ................(Indirect Method)

Particulars                                                                                                                                 Rs

(i) Cash flows from operating Activities                                                                                   

Net Profit as per Profit and Loss A/c or difference

between closing balance and opening balance of Profit

and Loss A/c

Add :    Transfer to reserve                                                                                xxx

Proposed dividend for current year                                                        xxx

Interim dividend paid during the year                                                      xxx

Provision for tax made during the current year                                        xxx

Extraordinary items, if any, debited to Profit and Loss A/c                      xxx

                                                                                                                        xxx

Less : Extraordinary Items, if any, credited to Profit                                            xxx

and Loss A/c

A. Net profit before taxation and Extra ordinary items                                         xxx

Adjustment for Non-Cash and Non-Operating Items.

B. Add :

– Depreciation                                                                                                   xxx

– Preliminary expenses                                                                                      xxx

– Discount on issue of shares and debentures written off                                    xxx

– Interest on borrowings and debentures                                                            xxx

– Loss on sale of fixed assets                                                                           xxx                  

xxx

C. Less :          

– Interest income/received                                                                                 xxx

– Dividend income received                                                                               xxx

– Rental income received                                                                                   xxx

– Profit on sale of fixed asset                                                                            xxx

xxx

D. Operating profits before working capital changes

(A + B – C)                                                                                                                                xxx

E. Decrease in current assets and increase in current liabilities                             xxx

F. Less : Increase in current assets and decrease in current liabilities                   xxx

G. Cash generated from operations (D + E – F)                                                                          xxx

H. Less : Income tax paid (Net tax refund received)                                                                     xxx

I. Net cash from operating activities                                                                                           xxx

(ii) Cash from investing accounting

Add :

– Proceeds from sale of fixed assets                                                                 xxx

– Proceeds from sale of investments                                                                 xxx

– Proceeds from sale of intangible assets                                                          xxx

– Interest and dividend received                                                                         xxx                  xxx

Less :

– Rent income                                                                                                               xxx

– Purchase of fixed assets                                                                                xxx

--Purchase of investment                                                                                   xxx

– Purchase of intangible assets like goodwill                                                      xxx                   xxx

Net cash from (or used in) investing activities                                                                             xxx

(iii) Cash flows from financing activities

Add :

--Proceeds from issue of shares and debentures                                                xxx

--Proceeds from other long term borrowings                                                       xxx

xxx

Less :

--Final dividend fund                                                                                          xxx

--Interim dividend fund                                                                                       xxx

--Interest on debentures and loans paid                                                              xxx

--Repayment of loans                                                                                        xxx

--Redemption of debenture preference shares                                                     xxx                   xxx

Net cash from (or used in) financing activities                                                                             xxx

(iv) Net increase/Decrease in cash and cash equivalent (i + ii + iii)                                            xxx

(v) Add : cash and cash equivalents in the beginning of the year

– cash in hand                                                                                                   xxx

– cash at bank overdraft                                                                                                xxx

– short term deposit                                                                                          xxx

– marketable securities                                                                                      xxx                  xxx

(vi) Closing cash and cash equivalents in the end of the year                                                  xxx

                                                                                                           

Direct Method

Particulars Rs

(i) Cash flow from operating activities

A. Operating cash receipts

– Cash sales                                                                                                     xxx

– Cash received from customers                                                                        xxx

– Trading commission received                                                                          xxx

– Royalties received                                                                                          xxx                   xxx

B. Less : Operating cash payment

– Cash purchase                                                                                               xxx

– Cash paid to the supplier                                                                                xxx

– Cash paid for business expenses like                                                              xxx                  xxx

office expenses, Manufacturing expenses,

selling and distribution expenses

C. Cash generated from operation ( A – B)                                                                                 xxx

D. Less Income tax paid (Net of tax refund received)                                                                  xxx

E. Cash flow before extraordinary items                                                                                                 xxx
F. Net cash flow from (or used in) operating activities                                                                 xxx

(ii) Cash flow from investing activities (calculation same as under indirect method)

(iii) Cash flow from financing activities(Calculation same as under indirect method)

(iv) Net increase/decrease in cash and cash equivalents (i + ii + iii)                                               xxx

(v) Add cash and cash equivalent in the beginning of the year                                                     xxx

(vi) Closing cash and cash equivalents in the end of the year                                                      xxx