The document discusses the preparation of a cash flow statement. It explains that a cash flow statement reflects the movement of cash from three activities: operating, investing, and financing. It provides examples of items that would be classified under each activity. It also discusses the direct and indirect methods for preparing the cash flow statement and provides sample formats for both.

1. Cash Flow Statement
• Profit ≠ Cash
• As P & L a/c is prepared on Accrual basis
• The term cash mean & include –
1. Cash in Hand
2. Demand deposit with banks
p
3. Cash Equivalents

2. Cash Flow Statement
• AS-3 & IAS-7
• Cash Flow Statement reflects the movement
of cash from three Activities of the firm
• Operating Activities
• Investing Activities
• Financing Activities

3. Exercise
Classify the following into three activities
1 Borrowed from a bank and purchased land 4,00,000
2 Sold investment securities 7,00,000
3 Paid dividends 3,00,000
4 Issued 500 equity shares 3,50,000
3 50 000
5 Purchased machinery and equipment 1,75,000
6 Bank loan paid 6,50,000
7 Received accounts receivable outstanding 1,00,000
8 Accounts payable increased 1,90,000

4. Preparation of CFS
• Direct Method
• Comparatively more useful
• Disclose gross receipts & gross payments
• I di t Method
Indirect M th d
• Profit & Loss a/c is reconciled for the effects of
transaction of non – cash nature
nat re

5. Format: Direct Method
Statement of Cash Flows (Direct Method ) …..Company Name
For the year ended….
Cash flows from operating activities
Cash received from customers
Interest received
Cash paid for merchandise
Cash paid for Income taxes
Net cash flow from operating activities XXX (A)
Cash flows from investing activities
Purchase of marketable securities
Proceeds from sale of marketable securities
Cash paid for purchase of plant assets
Loan made to borrowers
Collection on loans
Cash received from sale of plant assets XXX (B)
Net cash from investing activities
Cash flows from financing activities
Proceeds from borrowings
Cash paid to settle short-term debts XXX (C)
Cash paid to retire long term debt
Cash received from issuing stock
Cash paid for dividends
Net cash provided by financing activities
A+B+C
Net increase (decrease) in cash
XXX
Cash and cash equivalent at the beginning of the year
XXX
Cash and cash equivalents at the end of the year

6. Format: Indirect Method
Net profit before tax and extraordinary items
(+) Depreciation
(+) Amortization of intangible assets
(+) Preliminary expenses written off
(-) Gain on sale of fixed assets / investments
(+) Loss on sale of fixed assets / investments
Operating profit before working capital changes
(+) Decrease in current assets
( -) Increase in current assets
(+) Increase in current liability
(-) Decrease in current liability
(-) Income tax paid
(±) Extraordinary items A
NET CASH FLOW PROVIDED BY (or USED IN ) OPERATING ACTIVITIES
Cash flows from investing activities
(+) Sale of assets / investments
(-) Purchase of assets / investments
NET CASH FLOW PROVIDED BY (or USED IN ) INVESTING ACTIVITIES B
Cash flows from financing activities
(+) Proceeds f
P d from long t
l term b
borrowings
i
(+) Proceeds from issue of share capital
(-) Dividends paid
(-) Interest paid
NET CASH FLOW FROM FINANCING ACTIVITIES C
Net increase / decrease in cash and cash equivalents A+B+C
(+) Cash and cash equivalents in the beginning XXX
Cash and cash equivalents at the end XXXXX

7. CFS: Indirect Performa
• Classify the extraordinary items based on the
Activities
• Tax flow also to be classified based on the
Activities
• D not i l d the non – cash transactions
Do include h h i
• Generally put as note to the statement

8. Non-Cash items
• Purchase of long – term assets by issuing
equity share capital.
q y p
• Retirement of bonds by issuing equity share
p
capital.
• Issue of debt to purchase fixed assets.
• Exchange of non cash assets for other non
cash assets.
• Conversion of preferred share to equity share

9. Steps to Prepare CFS
• Information needed for its preparation –
1. Comparative Balance Sheet
2. Income Statement
3. Additional information
• Steps to prepare CFS
• Analyse the Non – Current Accounts
• Analyse the profit & loss figure
• Chart the cash flow statement