What Is the Cash Flow Statement? How the Cash Flow Statement Is Prepared?

What Is the Cash Flow Statement?

The cash flow statement presents the cash inflow and outflows of a business during a specific period. The cash flow statement is divided into 3 sections as explained below:

Cash flow from Operating Activities

This section explains the cash flows from normal operational activities of the Company whether it is the sale of goods or rendering of services. There are 2 methods of presenting operating cash flows i.e. direct and indirect method.

Direct method:

Under this method operating cashflow is differentiated between various types of cash inflows and outflows such as:

  • Cash inflow from Sale of goods/services
  • Cash outflow on payment against purchase of inventories
  • Cash outflow on payments of utilities, other operational expenses
  • Cash outflow on payment of taxes

Indirect method:

Under this method operating cash flows are calculated using net income for the period and adjusting it for:

  • Working capital changes (ie. Differences between opening and closing balances of stock in trade, advances & prepayments, creditors & trade liabilities, and trade debts)
  • Non-cash items such as depreciation and provision (as these do not result in any cash flow);
  • Losses/ gains on assets or other investing items (as these items are clubbed under investing activities)
  • Other income (as these are included in investing activities)
  • Financial charges (as these are included in financing activities)

Cash flow from investing activities

This section explains the cash flows from investing activities such as:

  • Purchase of operating assets – (cash outflow)
  • Disposal of operating assets – (cash inflow)
  • Purchase of investments – (cash outflow)
  • Sale of investment – (cash inflow)
  • Dividend received on investment – (cash inflow)
  • Interest income on long term deposits – (cash inflow)

Cash flow from financing activities

This section explains the cash flows from financing activities such as:

  • Issuance of share capital – (cash inflow)
  • Payment of dividend on share capital – (Cash outflow)
  • Issuance of preference shares  – (cash inflows)
  • Payment of interest on preference shares – (Cash outflow)
  • Long term loan from banks – (cash inflow)
  • Repayment of long term loan  – (cash outflow)
  • Payment of interest on long term loan– (cash outflow)

Example:

Assume the following financial data:

Working

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