Cash Flow Statement

Cash flow statement are statement of changes in the financial position of the
business due to inflow & outflow of cash.Statement of cash flow is
required for short range financial planning.
Cash flow statement are the summarized form of inflow of cash from different
sources & the uses to which cash has been applied.
Preparation of cash flow statement
Cash flow statement takes into account only those transactions , which
results in immediate inflow & outflow of cash.The preparation of cash
flow statement involves following steps:
1. Cash From Operations: It includes cash received against profit & inflow
or outflow of cash due to change in current asset & current liabilities.
Calculation of cash from operation involves the following:
a) Operational profit: While calculating operating net profit we take into
account only operating income & operating expenses.
b) Changes in the current assets & liabilities.
c) Changes in non-current liabilities & non-current assets.

Calculation of operational profit

Profit here means operating profit. While calculating the operating profit we take into
a/c only operating expenses & operating income.If the net profit is picked up from
P/L a/c non-operating expenses will be added to it & non-operating income are to
be deducted.
Non-operating Expenses

1. Depreciation: is charged on fixed assets. It appears on debit side of Profit & Loss
a/c & thus reduces profit. Depreciation is a non-cash item, so it does no reduce
cash. In order to ascertain operating profit, depreciation will be added to net profit.

2. Amortisation of Intangible Assets: consists of those assets, which cannot be seen
or touched. These assets are goodwill, Patents, trademarks etc. These assets are
not intangible & they do not have any real value. It is therefore always desirable to
write off these assets at the earliest. Intangible assets are written off out of P/L
a/c. In this way profit is reduced, when these assets are written off but outflow of
cash does not take place. In order to calculate Cash from operations, we have to
add back these items to the profits made during the year.

3. Preliminary expenses, discount or loss on issue of shares: when these are written
off, they are charged out of P/L a/c & thus reduce profits. Cash will not be
reduced. So it is necessary to add to find out operating profit during the year.



4. Loss on sale of fixed assets: The profit of the year will reduce with
this loss but cash will not reduce. It is therefore necessary that this
item should be added to the profit to ascertain the amount of
operating profit.

5. Provision for doubtful debts & Discount on debtors: This provision
reduces profit without reducing cash. As such the item should be
added to profit to ascertain the operating net profit.

Non-operating Income

Incomes not concerned with the day-to-day affairs of the business
are known as Non-operating Income. Non-operating income should
be deducted to find out operating net profit.


Changes in the current assets & liabilities.
Current assets consist of Debtors,stock,B/R,short term investments etc.
1. Change in the value of debtors:Decrease in current assets results in
inflow of cash.Let us suppose debtors during the previous year were
80,000 & during the current year it is only 70,000.we assume that
debtors has been collected.Collection from these debtors will increase
cash. Debtors at the end are part of the credit sales made during the
year.With this credit sale profit wil increase but cash wont. it can be
summarized as follows:-
Cash from operations: Net profit
(+) Debtors at the beginning
(-) Debtors at the end.
It can be further summarized as follows:
Cash from operations: Net Profit
(+) Net decrease in debtors
or
(-) Net increase in debtors

Current liabilities
Change in the value of creditors:Opening balance of creditors belong to
previous year,so it must have been paid during the current year & thus
cash from operation will reduce with this payment.Closing Balance of
creditors have not been paid, but they reduce the net profit so closing
balance of creditors will be added.
It can be summarized as under:Net Profit
(+) Closing stock of creditors
(-) Opening stock of creditors
Alternatively
Net Profit
(+) Increase in creditors
(-) Decrease in creditors
Change in non-current liabilities & non-current assets.
1. Following non-current liabilities will result in inflow of cash:
a) Issue of shares or increase in capital.
b) Issue of debentures.
c) Increase in loan.
Outflow of cash:
a) Redemption of share capital or decrease in share capital.
b) Repayment of debentures.
c) Decrease in loan.
d) Payment of tax & dividend.
Non-current assets
Sale & Purchase of FA.

Preparation of cash flow statement
Format of cash flow statement
Opening balance of cash: _______

Add Inflows:
Cash from operations _______
Issue of shares _______
Issue of debentures _______
Increase in loan _______
Sale of Fixed assets _______
Less Outflows:
Redemption of share capital _______
Repayment of debentures _______
Decrease in loan _______
Payment of tax & dividend _______
Closing balance of cash _______