How to Make Cash Flow Statement (as per AS)
Cash flow statement. As the name itself indicates the
statement which only deals with inflow and outflow of cash (and cash
equivalents) during the accounting year. Our work is to classify those inflows
and outflows into three activities namely operating, investing and financing
activities. Cash from Operating Activities include cash
generated from production and related activities i.e. cash generated in the
normal course of business.
Some of inflows and outflows include:
1. Receipts from sale of goods
2. Operating expenses (Cash related)
3. Payments for purchase of goods and services
4. Commissions and royalties received etc.
Cash from Investing Activities include cash flows from
long term investments and sale or acquisition or generation (Capital
work-in-progress) of long term assets.
Some of inflows and outflows include:
1. Receipts from sale of long term assets and
investments
2. Payments for acquisition of long term investments
and assets
3. Interest and Dividends received
4. Loans and advances to third parties etc.
Cash from Financing Activities include cash flows
which result from change in the capital and borrowings of the company.
Some of inflows and outflows include:
1. Redemption of preference share capital and debentures
2. Receipts from issue of equity shares, preference shares,
loans, debentures etc.
3. Interest and dividend payments etc.
Preparation of cash flow statement (Direct method):
It is the easiest method. The only difference between direct
and indirect method is procedure of arriving at cash from Operating Activities.
In direct method you will directly consider cash related items and exclude any
non-cash items while arriving at cash from Operating Activities. Simply you are
preparing cash P&L a/c. anyhow while preparing cash flows from Investing
and Financing you will add any receipts and deduct any payments directly.
Preparation of cash flow statement (Indirect
method):
While starting with operating activities, you will consider
Net profit before taxes
How to arrive at net profit before taxes:
Operating Activities:
Difference between P&L a/c balances of two years in the
B/S
Add:
1. Transfer to reserves
2. Provision for dividend
3. Provision for tax
Then you will arrive at Net Profit before taxes. After
arriving at this figure.
Add:
1. Any miscellaneous expenditure written off during the year
(preliminary expenses, premium on redemption etc.)
2. Loss on sale of fixed assets/ long term investments
(since non – operating expenses)
3. Depreciation provided during the year (since no – cash
item)
4. Any foreign exchange loss (since no – cash item)
5. Dividend or Interest paid (since non – operating
expenses) etc.
Less:
1. Profit on sale of fixed assets/ long term
investments
2. Any foreign exchange gain
3. Dividend or interest received etc.
Now you will arrive at operating profit before working
capital changes, extraordinary items and taxes.
Then Adjustments for working capital changes:
Add:
1. Decrease in current assets
2. Increase in current liabilities
Less:
1. Increase in current assets
2. Decrease in current liabilities
Now you will arrive at “Cash generated from
Operations”.
Less: Any taxes paid during the year
You will arrive at “Cash from Operating Activities
before Extraordinary Items”
Add: Refund of Taxes, Insurance claim received etc.
Less: Voluntary Separation Scheme etc.
Now you will arrive at “Net Cash from Operating
Activities". (A)
Investing Activities:
Add:
Receipts from sale of Long term Assets/Investments
Interest/Dividend received
Less:
Purchase of Long term Assets/Investments
Expenditure on Capital Work in Progress
Loans given to any third parties
Now you will arrive at “Net Cash from Investing
Activities”. (B)
Financing Activities:
Add:
Share Capital/loans/debentures issued
Less:
Interest/Dividend paid
Redemption of Preference/Debentures/Loans
Now you will arrive at “Net Cash from Financing
Activities”. (C)
1. Net Cash received/paid during the year (A) + (B)
+(C)
2. Opening balance of cash and cash equivalents
3. Closing Balance of Cash and Cash equivalents
NOTE 1:
You will add Provision for dividend and Provision for tax
only when they are Non-Current Liabilities. If you assume them as current
liabilities then you should show these under Working Capital Changes.
NOTE 2:
Verify whether such expenses had been written off against
the securities premium available. If the Securities Premium a/c balance has
decreased compared to previous year then you should not add these expenses.
NOTE 3:
Any extraordinary items should be shown under
appropriate activity separately. These items include:
1. Insurance claim received
2. Refund of tax
3. Winnings from law suit etc.
NOTE 4:
If there is any foreign exchange gain or loss a
reconciliation statement to be prepared reconciling the Cash and Cash
equivalents balances, as there is no inflow or outflow of cash.
Thanks and Best Regards
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