How To Prepare Cash Flow Statement

HOW TO PREPARE CASH FLOW
STATEMENT ?
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
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5 DECEMBER 09 www.afterschool.tk 1
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What is a cash flow statement ?
It is possible that the business may earn profit,

yet threre is no cash. Cash flow statement
shows the flow of cash in the organisation –
how much cash has come in and how much has
gone out.
Why do we need cash flow
statement ?
Business depends on liquidity. If there is no

liquidity, there is no growth in business. We
have to understand cash flow statements in
order to grow our business
What are the methods to prepare
cash flow statement ?
There are 2 mthods :

1 direct
2. indirect method
What is direct method ?
List down all the cash transactions - find out

what is the net impact – whether cash has
increased or decreased
What is indirect method ?
We pick up profit and loss account to pick up

net profit. Now we adjust net profit by
removing non-cash items. For example, we add
back depreciation (as there is no cash outflow
in depreciation) and we subtract non-cash
income
What are the types of cash flows ?
There are 3 types of cash flows :

1. operating cash flow = for day to day business
transactions
2. financing cash flow = non-operating cash flow =
capital / long term funds transfers / loans / money
borrowed etc
3. investment cash flows = purchase of assets / long
term resources for company / sale of assets
What type of cash flows are
these ?
1. sale of old machinary
2. purchase of raw material
3. cash sales
4. issue of preference share
5. redemption of debenture
6. investment in 10 year govt bond
ans : operating = 2,3, finance = 4,5 investment= 1,6
What is impact of change in
foreign currency on cash flow ?
For fixed assets = no change
if you have a building in the USA, there is no cash
flow due to change in foreign currency.
But the effect of exchange rate changes on cash and
cash equivalents held or due in foreign currency is
reported in the cash flow statement
suppose you have $2000 in a bank in the USA, its
value in Rs. Will change due to forex changes, so this
must be reported
What is cash received from
interest / dividend received from
investments ?
Cash flow from investment activities

but, In the case of financial enterprises, cash
flows arising from interest paid and interest
and dividends received, should be classified as
cash flows from operating activities.
Where should we show cash flow
due to interest paid / dividend
paid to investors ?
cash flows arising from interest paid should be

classified as cash flows from financing
activities ; dividends paid should be classified
as cash flows from financing activities.
Exceptions = mutual funds etc = as it is
operating activity for them
What are tax flows?
Cash flows arising from taxes on income

should be separately disclosed and should be
classified as cash flows from operating
activities
What are takeovers /
acquisitions ?
cash flows arising from acquisitions and from

disposals of subsidiaries or other business units
should be presented separately and classified as
investing activities.
Give examples of non-cash
transactions ?
the acquisition of assets by assuming directly
related liabilities example : took over an ailing
hospital by taking over all its liability
the acquisition of an enterprise by means of
issue of shares.
conversion of debt into equity
acquisition of assets in exchange of assets
What will you add / subtract from
net profit in indirect method ?
(+) Depreciation on assets,
( + )interest paid (shown in financing activities )
(+) loss on sale of fixed assets
( - ) profit on sale of fixed assets
( - ) dividends / interest received
( - ) Increases in current assets
(+) Decreases in current assets
(+) Increases in current liabilities
( - ) Decreases in current liabilities
( - ) Income-tax paid
Example – prepare a cash flow
statement
Balance sheet : 2008-9 : assets : building 2000, furniture : 2400,
debtors 3000 stock 4000, cash 2000, BR 2000 acrued income 600
total 14000
liabilities : capital 2000, loan 8000, bank od 3000, creditors 1000
total : 14000
debtors 6000 stock 6000, cash 3000, BR 1000 total 25000
liabilities : capital 2000, profit 10000 loan 6000, bank od 2000,
creditors 4000 outstand. Exp 1000 total : 25000
sale = 1 lakh, expenses 40000, purchase 40000 (including
depreciation 1000, interest 1000) income tax paid 10000
Direct method
Adjust sales to know about cash sales
total sale 1 lakh
less closingbalance of debtors, BR, (7000)
add opening balance of debtors &
BR(3000+2000) = (5000)
net cash sales = 98000
contd.....
contd...
Adjust purchases to know about cash

purchases : 40000
less closing creditors - 4000
add opening creditor 1000
add closing stock 6000
less opening stock -4000
cash purchase = - 39000
contd...
Adjust expenses to know about cash operating

expenses expenses
Expenses 40000
less depreciation- 1000
less interest- 1000 (it will go in financing)
less closing out. Exp- 1000
net cash exp : 37000
Net cash flow from operations
Cash from sales = 98000

cash purchase - 39000
expenses - 37000
income tax - 10000
add acrued income of last year+ 600
net cash inflow = 12600
Cash flow from financing
Capital = no change
loan = - 2000
interest = -1000
net cash outflow = - 3000
Cash flow from investing
Building = - 4000 (opening blanace 2000 less

depreciation - 1000 closing balance -5000)
furniture = - 1600
total cash flow = - 5600
Cash flow
Opening balance (cash + bank od) -1000

+add cash flow from operating 12600
- less cash flow in financing -5600
- less cash flow in investing -3000
net closing balance 1000 (it should be 3000)
try to find out the reason for this difference
Indirect method
Net profit 10000

adjust for depreciation + 1000
difference in stock - 2000
difference in debtors - 2000
difference in creditors 3000
difference in outstanding exp. 1600
net cash profit = 11600
Indirect method inveting
Building = - 4000 (opening blanace 2000 less

depreciation - 1000 closing balance -5000)
furniture = - 1600
Indirect method – financing
Capital = no change
loan = - 2000
interest = -1000
net cash outflow = - 3000
Net cash flow
Opening balance (cash + bank od) -1000

+add cash flow from operating 11600
- less cash flow in financing -5600
- less cash flow in investing -3000
net closing balance 1000 (it should be 2000)
try to find out the reason for this difference
Prepare cash flow statement from
the following :
Balance sheet : 2008-9 : assets : building100 , furniture : 100,

liabilities : capital 200, loan 200, creditors 200 total : 600
liabilities : capital 300, profit 1000 loan 100, creditors 400 total :
1800
sale = 10000, expenses 4000, purchase 5000
No depreciation, no interest payments
Cash from operations - indirect
method
Net profit 1000
adjust for depreciation nil
difference in stock + 50
difference in debtors -500
difference in BR -100
difference in creditors +200
net cash profit = 650
Cash from financing ....
Capital =+100
loan = -100
interest = nil
net cash flow = zero
Cash from investing
Building = - 400
furniture = - 300
Cash flow statement
Opening cash 100

add : cash from operations = 650
less cash from investing = -700
cash from financing = nil
closing balance = 50
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HOW TO PREPARE CASH FLOW

My purpose here is to give an introduction of how to

It is possible that the business may earn profit,

Business depends on liquidity. If there is no

There are 2 mthods :

List down all the cash transactions - find out

We pick up profit and loss account to pick up

There are 3 types of cash flows :

Cash flow from investment activities

cash flows arising from interest paid should be

Cash flows arising from taxes on income

cash flows arising from acquisitions and from

Adjust purchases to know about cash

Adjust expenses to know about cash operating

Cash from sales = 98000

Building = - 4000 (opening blanace 2000 less

Opening balance (cash + bank od) -1000

Net profit 10000

Building = - 4000 (opening blanace 2000 less

Opening balance (cash + bank od) -1000

Balance sheet : 2008-9 : assets : building100 , furniture : 100,

Opening cash 100

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