Question

How is the statement of cash flows prepared? What information is used when preparing the statement of cash flows?

Answer 1

1)Cash flow statement is prepared using the data provided in Income statement and Balance sheet .It is prepared to reconcile the beginning cash balance to ending cash balance to determine how much cash is earned (spent) during the period .Basically cash flow stAtement is dividend in to Three activities :

a)cash Flow from operating activity : This activity taken in to consideration that affectscash flow from the normal operations of Business.such as Sales , purchase ,cash operating expense .There are two method for finding cash flow from operating activity Direct method and indirect method .

Under DIrect method , cash Items affecting income statement is only considered that is cash from sales ,cash payment to suppliers ,cash payment for operating expense etc.

Under Indirect method ,Net income will be used and then adjustment for non cash item are made to calculate cash flow from operating activity

b)Cash flow from Investing activity :cash flow used or provided by making investment in long term asset are considered such as sale of asset ,purchase of asset .

c)cash flow from financing activity :cash flow provided or used to finance the long term needs of business is a part of financing activity such as long term note payable issued ,treasury stock purchased .

2)Cash Flow statement is prepared using Income statement and Balance sheet that affects the cash during the year