Explain the various steps involved in preparing a Cash Flow Statement

Cash plays a very important role in the entire economic life of a business. Cash Flow Statement is a statement like Fund Flow Statement. A Cash Flow Statement concentrates to transactions that have a direct impact on cash. It deals with the inflow and outflow of cash between two Balance Sheet. That is, it explains the changes in cash position between the two period. Cash Flow mean inflow and outflow of cash during accounting period. From the beginning of the year up to the end of the year cash is received from various sources and spent on various heads. Incoming and outgoing of cash is termed as cash flow. The term cash here stands for cash and bank balances.

When the management is interested to know about the movement of cash and the availability of cash, the cash flow analysis provides this information. Cash Flow Statement is a Statement of recording systematically all inflows and outflows of cash of the accounting period. Thus it shows the sources (inflow) of cash receipts and the purpose for which payments (outflow) are made. It is like a receipts and payments account in a summary form.

Steps in Preparing Cash Flow Statement:

1. Opening of Accounts for Non-current Items (To find out the hidden information).
2. Preparation of adjusted P & L Account ( to find out cash from operation or profit, and cash lot in operation or loss).
3. Comparison of current items (to find out inflow or outflow of cash).
4. Preparation of Cash Flow Statement.

To prepare Account for all non-current items is easier for preparing items is easier for preparing Cash Flow Statement.

Cash from operation can be prepared by this formula also:

	Decrease in Current Assets	Increase in Current Assets
Net Profit +	Increase in Current -	Decrease in
	Liabilities	Current Liabilities

Cash Flow Statement can be prepared in statement form or account form.

A Specimen Cash Flow Statement

Account form of cash flow statement is normally followed by all.

Cash Flow Statement:

Inflow of Cash		Outflow of Cash
Opening Cash Balance	xxx	Redemption of Pref. Shares	xxx
Cash from Operation	xxx	Redemption of Debentures	xxx
Sales of Assets	xxx	Repayment of Loans	xxx
Issue of Debentures	xxx	Payment of Dividends	xxx
Raising of Loans	xxx	Pay of Tax	xxx
Collection from Debentures	xxx	Cash Lost in Operations	xxx
Refund of tax	Xxx		Xxx

Cash from operation can be calculated in two ways.

1. Cash Sales Method:

Cash Sales – (Cash Purchases + Cash Operations Expenses)

2. Net Profit Method:

It can be prepared in statement form or by Adjusted Profit and Loss Account.