Steps in Preparation of Cash Flow Statement

The pattern of cash flow statement preparation is similar to pattern used in fund flow statement. The only difference between the two statements is the working capital whose preparation is not required. Apart from this part, other procedures are similar to fund flow statement.

Preparation of cash flow statement is based on the deduction of following points:

  • When every transaction is not cash transaction
  • When cash is used for all the transactions

In here, all transactions are taken into account as cash transaction with the help of which we need to solve the problems.

Preparation steps of cash flow statement

  1. Preparing a working capital statement is not a requirement

You don’t need to keep a separate statement for recording the changes in working capital. Cash flow statement itself adjusts any changes in current liabilities and in current assets.

  1. Preparing a cash flow statement

In case of preparation of cash flow statement, it is divided into 4 columns in following order.

The inflow of cash is placed at the extreme left; the amount comes in both places, i.e., after inflow of cash and outflow of cash, and the outflow of cash lies at the extreme right just before the other amount column.

The placing is done in the following way,

Inflow of cash – Amount – Outflow of cash – Amount

Against inflow of cash, you can find opening cash balance, issues of share, cash from operations and much more.

Against outflow of cash, you can find repayment of repayment holders, purchase of fixed assets, income tax pain and others.

  1. Profit and Loss Account Preparation

There are two methods through which cash from operation can be calculated.

  • Statement system
  • Preparing profit and loss account

The most preferred and convenient method to prepare profit and loss account is cash of operation.

  1. Individual ledger preparation

We already know that balance from a ledger can be moved to cash flow statement. A separate account for liabilities or asset is required if any information related to any certain asset or liabilities are specified in the adjustment.

  1. Treatment of adjustments

Adjustment is referred to the extra information which is given separately from the balance sheet. The statement is divided into two sections comprising of adjustment and its treatment.

Against dividend paid, the treatment is cash flow statement on the outflow side, and profit and loss account on the debit side.

For depreciation, profit and loss account on the debit side.

For loss on sale of an asset, profit and loss account on debited side and respective asset account on credited side.

Against income tax, income tax on the credit side and profit and loss account on the debit side.

This adjustment is applicable to both fund flow statement and cash flow statement.

Questions

  1. Describe cash flow statement.
  2. What are the preparation steps for cash flow statement?
  3. Why is cash flow statement prepared?
  4. Differentiate between fund flow statement and cash flow statement.
  5. State benefits of cash flow statement.
  6. Describe limitations related to cash flow statement.

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