CASH FLOW STATEMENT

Cash Flow Statement – Direct & Indirect Method

Cash Flow Statement also known as Statement of Cash Flows is a statement which shows the Changes in the Cash Position of an organisation between 2 periods. Along with showing the changes in the Cash Position of an organisation, it also depicts the reasons for such change during the period.

The main reason for the preparation of the Cash Flow Statement is that the Income Statement of an enterprise is always prepared on an Accrual Basis and it may show profits in the Income Statement but the Cash received out of these profits may be low to run the business or vice-versa.

 

PREPARATION OF CASH FLOW STATEMENT

Cash Flows Statement is required to be prepared using International Accounting Standard 7 (or using the Accounting Standard 3 in India). While preparing the Cash Flow Statement, the cash flows during the period are classified into 3 major categories:-

I. Cash Flow from Operating Activities (Direct Method/ Indirect Method)

II. Cash Flow from Investing Activities

III. Cash Flow from Financing Activities

Classification by activities provides information that allows users to assess the impact of those activities on the financial position of the enterprise. This information also helps in evaluating the inter-relationships between these activities.

Cash Flows from Operating Activities

Cash Flows from operating Activities are primarily derived from the Principal Revenue-producing activities of the enterprise.

There are 2 methods of preparing the Cash Flows from Operating Activities:-

1.      Direct Method

2.      Indirect Method

 

1. Cash Flow from Operating Activity- Direct Method

While preparing the Cash Flow Statement as per Direct Method, Actual Cash Receipts from Operating Revenues and Actual Cash Payments for Operating Activities are arranged and presented in the Cash Flow Statement. The difference between Cash Receipts and Cash Payments is the Net Cash Flow from Operating Activities under the Direct Method. In other words, it is a Income Statement (Profit & Loss A/c) prepared on Cash Basis under the Direct Method.

While preparing the Cash Flow Statement as per Direct Method, items like Depreciation,Amortisation of Intangible Assets, Preliminary Expenses, Debenture Discount etc are ignored from Cash Flow Statement since the Direct Method includes only Cash Transactions and Non-Cash Transactions are omitted.

Likewise, no adjustment is made for Loss/Gain on the Sale of Fixed Assets and Investments while preparing the Cash Flow Statement as per the Direct Method.

Format for Computation of Cash Flows from Operating Activities as per Direct Method

Particulars	Amount
Cash Receipts from Customers	xxx
Cash Paid to suppliers and employees	(xxx)
Cash generated from Operations	xxx
Income Tax Paid	(xxx)
Cash Flow before Extra-ordinary Items	xxx
Extra-ordinary items	xxx
Net Cash from Operating Activities (Direct Method)	xxx

2. Cash Flow from Operating Activity – Indirect Method

While preparing the Cash Flow Statement as per the Indirect Method, the Net Profit/Loss for the period is used as the base and then adjustments are made for items that affected the Income Statement but did not affect the Cash

While preparing the Cash Flow Statement as per the Indirect Method, Non Cash and Non Operating charges in the Income Statement are added back to the Net Profits while Non-Cash & Non-Operating Credits are deducted to calculate the Operating Profit before Working Capital Changes. The Indirect Method of preparation of Cash Flow Statement is a partial conversion of accrual basis profit to Cash basis profit. Further, necessary adjustments are made for Increase/Decrease in Current Assets and Current Liabilities to obtain Net Cash Flows from Operating Activities as per the Indirect Method.

Format of Cash Flows from Operating Activities – Indirect Method

Particulars	Amount
Net Profit before Tax and Extra-ordinary items	xxx
Add:-  Adjustments for
- Depreciation for Current year	xxx
- Transfer to Reserve	xxx
- Loss on Sale of Fixed Assets	xxx
- Interest & Dividend paid	xxx
Operating Profit before Working Capital Changes	xxx
Adjustments for
- Trade and Other Receivables	xxx
- Inventories	xxx
- Trade Payable	xxx
Cash generated from Operations	xxx
Net Cash Flow from Operating Activities (Indirect Method)	xxx

II. Cash Flow from Investing Activities

The activities of Acquisition and Disposal of Long Term Assets and other Investments not included in cash equivalents are Investing activities. Separate disclosure of Cash Flows arising from Investing Activities is important because the Cash Flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

Format of Cash Flow from Investing Activities:-

Particulars	Amount
Purchase of Fixed Assets	(xxx)
(Add) Proceeds from Sale of Fixed Assets	xxx
(Add) Interest received	xxx
(Add) Dividend received	xxx
Net Cash Flow from Investing Activities	xxx

III. Cash Flows from Financing Activities

Financing Activities are those activities which result in a change in the size and composition of owner’s capital and borrowing of the organisation. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting the claims on future cash flows by the providers of funds.

Format of Cash Flow from Financing Activities:-

Particulars	Amount
Proceeds from Issue of Share Capital	xxx
Proceeds from Long Term Borrowings	xxx
Repayment of Long Term Borrowings	(xxx)
Interest Paid	(xxx)
Dividend Paid	(xxx)
Net Cash Flows from Financing Activities	xxx

The Comprehensive Format of the complete Cash Flow Statement is as follows:-

Particulars	Amount
Cash flow from Operating Activities (Direct Method/ Indirect Method)	xxx
(Add) Cash Flow  from Investing Activities	xxx
(Add) Cash Flow from Financing Activities	xxx
(=)Net Increase/Decrease in Cash	xxx
(Add) Opening Balance of Cash & Cash Equivalents	xxx
(=) Closing Balance of Cash & Cash Equivalents	xxx