Preparation of Cash Flow Statement

Preparation of Cash Flow Statement

The cash flow statement shows the change in cash and cash equivalents over an accounting period. All activities that cause this change are classified into operating, investing, and financing activities. The final statement brings together the net cash flow from each activity to arrive at the net increase or decrease in cash and cash equivalents.

Structure of the Cash Flow Statement

The cash flow statement follows a standard format. Under each activity heading, you list the specific inflows and outflows. The net cash flow (or use) from each activity is calculated separately. Then:

• Add the net cash flows from all three activities to get the Net Increase/Decrease in Cash and Cash Equivalents
• Add the Cash and Cash Equivalents at the beginning of the period
• The result is the Cash and Cash Equivalents at the end of the period

This ending figure must match the total of cash in hand, cash at bank, and cash equivalents shown in the balance sheet.

Direct Method vs Indirect Method

The method used to compute cash flows from operating activities determines how the entire statement is named.

Indirect method cash flow statement — When operating activities are worked out using the indirect method (starting from net profit and adjusting for non-cash items and working capital changes), the statement is called an indirect method cash flow statement. Most companies in practice prefer this method. Unless a specific method is required, you should prepare the cash flow statement using the indirect method. …