This document provides an overview of how to prepare a cash flow statement. It discusses the three sections of a cash flow statement - operating, investing, and financing activities. It explains how to classify items as cash inflows and outflows and the key adjustments needed to convert net income to cash flow from operating activities using the indirect method. Examples are also provided to illustrate how to calculate cash flow for each section.

1. Cash Flow Statement
Presentation By:
• Ahmed Muhammad Masood Niazi straight from
Mianwali
• Saqib Tariq CHAUDHRY from Muniawala
• Saad Javed Satti from Kotli Sattiyan
• Mirza Umer Baig from Jeddah`
• Mian Haider Ali Shah from AKORA khattak
• Ayaz Tariq from MK

2. Statement of Cash Flow
• Provides information about cash inflows and outflows during
an accounting period.
• Focuses on Cash
• Three sections to the statement of cash Flows:
1. Cash flow from Operating Activities
2. Cash flow from Investing Activities
3. Cash flow from Financing Activities

3. Statement of Cash Flow
• While developing cash flow statement we need information from
balance sheet and income statement
• All items are classified as either cash inflows or cash outflows
If an item represents a cash INFLOW
 you ADD that item
If an item represents a cash OUTFLOW
 you SUBTRACT that item

4. Statement of Cash Flow
• Remember: Cash is on the left hand side of the Balance Sheet
• Assets = Liabilities + Equity
• Most classifications (In/outflow) are easy
An increase in gross fixed assets An increase of long-term debt
Cash inflow =Decrease in Assets or Increase in Liabilities or equity
Cash outflow =Increase in Assets or Decrease in Liabilities or equity

5. Methods of Preparing Cash
Flow Statement
There are two methods by which we can prepare
cash flow statement:
• Direct Method
• Indirect Method

6. Direct Method:
• very simple and result is more easily understood
• In this method you are analyzing or evaluating your
cash and bank accounts to identify cash flow
during the period.

7. Indirect Method:
• frequently used and most common method.
• less expensive to use.
• In this method you start with net income per the
income statement, reverse out entries to income
and expense accounts that do not involve a cash
movement

8. Indirect vs Direct
• The main difference between the direct method
and the indirect method is involvement of
the cash flows from operating activities.
• Under the direct method, the cash flows from
operating activities will include the amounts for lines
such as cash from customers and cash paid to
suppliers.
• In contrast, the indirect method will show net
income followed by the adjustments needed to
convert the total net income to the cash amount
from operating activities.

9. CF from Operating Activities
Start with the net profit (income) and “modify” until you get the
net cash flow
As Depreciation is non cash expense and we had subtracted it from the
income statement so we will add it back in cash flow statement.
Net income from Income Statement (starting point)
+ Depreciation
Changes in Current Assets (Accounts receivable, Inventories)
changes in Current Liabilities (Accounts payable, Accruals)
= Net cash flow from operating activities

10. Example
Net Profit 50000
Add
Depreciation 8000
Decrease in a/c receivables 5000
Less
Decrease in a/c payables (2000)
Loss on sale of asset (1000)
Cash flow from operations 60000

11. Operating cash flows include:
• Receipts from the sale of goods or services
• Receipts for the sale of loans, debt or equity
instruments in a trading portfolio
• Interest received on loans
• Payments to suppliers for goods and services.
• Payments to employees or on behalf of employees
• Interest payments
• Buying Merchandise

12. Items which are added back to [or subtracted from, as
appropriate] the net income are:
• Depreciation (loss of tangible asset value over time)
• Deferred tax
• Amortization (loss of intangible asset value over time)
• Any gains or losses associated with the sale of a non-
current asset, because associated cash flows do not
belong in the operating section.(unrealized gains/losses
are also added back from the income statement)
• Dividends received
• Revenue received from certain investing activities

13. CF from Investing
Activities
Buying or selling productive long-lived assets such as plants and
equipment
Zero (starting point)
Changes in Gross Fixed Assets
= Net cash flow from investing activities

14. Example
Cash flow from operations 60000
Cash flow from investing activities
Cash from sale of Mkt. Securities 5000
Cash advanced to borrowers (8000)
Cash proceeds from sale of asset 13000
Cash flow from investing activities 70000

15. Investing activities include:
• Purchase or Sale of an asset (assets can be land,
building, equipment, marketable securities, etc.)
• Loans made to suppliers or received from customers

16. CF from Investing
Activities
• While preparing CF from Investing Activities we are looking
for changes in Gross Fixed Assets, not Net Fixed Assets!
• What if Gross Fixed Assets are not reported in balance sheet?
Then we will first Calculate Dep. Then find out Gross fixed Assets
Depreciation (on the income statement) =
Change in Accumulated Depreciation (on the balance sheet)
Change in Gross Fixed Assets =
+ Change in Net Fixed Assets
+ Depreciation (on the income statement)

17. CF from Financing
Activities
• Financing Activities
This includes transactions related:
New loans (long-term, short-term debt)/Repayment of principal
Sale (issue) or repurchase of stock and Payment of dividends.
Zero (starting point)
Changes in Notes Payable, Current Portion of LT Debt, Long Term
Debt, Common Stock
- Dividend Payout (= Net Income – Change in Retained Earnings)
= Net cash flow from financing activities

18. Example
Cash flow from investing activities 70000
Cash flow from financing activities
Proceeds from sale of shares 8000
Dividend paid (1000)
Cash proceeds from N/P 12000
Net Cash flow 89000
Op cash 6000
Closing cash 95000

19. Statement of Cash flows:
Useful Relation
Net cash flow from Operating Activities
+ Net cash flow from Investing Activities
+ Net cash flow from Financing Activities
________________________________
= CHANGE in the cash account (balance sheet)