Cash Flow StatementCash flow statement are statement of changes in the financial

position of the business due to inflow & outflow of cash.Statement of cash flow is required for short range financial planning.

Cash flow statement are the summarized form of inflow of cash from different sources & the uses to which cash has been applied.

Preparation of cash flow statementCash flow statement takes into account only those transactions ,

which results in immediate inflow & outflow of cash.The preparation of cash flow statement involves following steps:

1. Cash From Operations: It includes cash received against profit & inflow or outflow of cash due to change in current asset & current liabilities. Calculation of cash from operation involves the following:

a) Operational profit: While calculating operating net profit we take into account only operating income & operating expenses.

b) Changes in the current assets & liabilities.c) Changes in non-current liabilities & non-current assets.

Calculation of operational profitProfit here means operating profit. While calculating the operating profit we take

into a/c only operating expenses & operating income.If the net profit is picked up from P/L a/c non-operating expenses will be added to it & non-operating income are to be deducted.

Non-operating Expenses 1. Depreciation: is charged on fixed assets. It appears on debit side of Profit &

Loss a/c & thus reduces profit. Depreciation is a non-cash item, so it does no reduce cash. In order to ascertain operating profit, depreciation will be added to net profit.

 2. Amortisation of Intangible Assets: consists of those assets, which cannot be

seen or touched. These assets are goodwill, Patents, trademarks etc. These assets are not intangible & they do not have any real value. It is therefore always desirable to write off these assets at the earliest. Intangible assets are written off out of P/L a/c. In this way profit is reduced, when these assets are written off but outflow of cash does not take place. In order to calculate Cash from operations, we have to add back these items to the profits made during the year.

 3. Preliminary expenses, discount or loss on issue of shares: when these are

written off, they are charged out of P/L a/c & thus reduce profits. Cash will not be reduced. So it is necessary to add to find out operating profit during the year.

  

4. Loss on sale of fixed assets: The profit of the year will reduce with this loss but cash will not reduce. It is therefore necessary that this item should be added to the profit to ascertain the amount of operating profit. 5. Provision for doubtful debts & Discount on debtors: This provision reduces profit without reducing cash. As such the item should be added to profit to ascertain the operating net profit.

Non-operating Income Incomes not concerned with the day-to-day affairs of the business are known as Non-operating Income. Non-operating income should be deducted to find out operating net profit.

Changes in the current assets & liabilities.

Current assets consist of Debtors,stock,B/R,short term investments etc.

1. Change in the value of debtors:Decrease in current assets results in inflow of cash.Let us suppose debtors during the previous year were 80,000 & during the current year it is only 70,000.we assume that debtors has been collected.Collection from these debtors will increase cash. Debtors at the end are part of the credit sales made during the year.With this credit sale profit wil increase but cash won’t. it can be summarized as follows:-

Cash from operations: Net profit(+) Debtors at the beginning(-) Debtors at the end.

It can be further summarized as follows:Cash from operations: Net Profit

(+) Net decrease in debtorsor(-) Net increase in debtors

Current liabilitiesChange in the value of creditors:Opening balance of creditors

belong to previous year,so it must have been paid during the current year & thus cash from operation will reduce with this payment.Closing Balance of creditors have not been paid, but they reduce the net profit so closing balance of creditors will be added.

It can be summarized as under:Net Profit(+) Closing stock of creditors(-) Opening stock of creditors

AlternativelyNet Profit(+) Increase in creditors(-) Decrease in creditors

Change in non-current liabilities & non-current assets.1. Following non-current liabilities will result in inflow of cash:a) Issue of shares or increase in capital.b) Issue of debentures.c) Increase in loan.Outflow of cash:a) Redemption of share capital or decrease in share capital.b) Repayment of debentures.c) Decrease in loan.d) Payment of tax & dividend.Non-current assetsSale & Purchase of FA.

Preparation of cash flow statementFormat of cash flow statementOpening balance of cash: _______

Add Inflows:Cash from operations _______Issue of shares _______Issue of debentures _______Increase in loan _______Sale of Fixed assets _______Less Outflows:Redemption of share capital _______Repayment of debentures _______Decrease in loan _______Payment of tax & dividend _______Closing balance of cash _______