CASH FLOW STATEMENT

INTRODUCTION

Every big and small firms performs cash transactions. Cash transaction refers to cash
inflows and outflows.Cash inflows and outflows help to review success, failure of a firm and
its ability to meet maturing debts. Such review and evaluation are possible if the statement of
cash flow is prepared.Accounting standard Board(ASB) at international level in 1996
suggested every firm to publish the statement of cash flow along with the final accounts.
Since then the statement of cash flow is getting more recognition than funds flow statement.

The statement that shows cash inflows and outflows of a firm for a specified period is
called the cash flow statement. Cash flow statement demonstrates where the cash has come
during the period and what the firm has done with the available cash. Therefore, cash flow
statement shows a picture of cash movement occurred in and out from a firm during a year in
a summarized form. Cash flow statement gives a picture of sources and applications of cash
of a firm for a year. The cash flow statement is not a cash book because it demonstrates
inflows and outflows of cash and near to cash items. Cash and near to cash cover entire items
of current assets and current liabilities. The cash flow statement reports increase and decrease
in cash by listing in meaningful categories in terms of operating,investing and financing
activities.

OBJECTIVES OF CASH FLOW STATEMENT

To provide information about the cash inflows and cash outflows from operating,
financing and investing activities of the firm.
To show the impact of the operating, financing and investing activities on cash
resources.
To tell how much cash came in during the period, how much cash went out and
what the net cash flow was during the period.
To explain the causes for changes in cash balance.
To identify the financial needs and help in forecasting future cash flows.

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IMAGINARY FIGURE PREPARATION FOR CASH FLOW
STATEMENT

This method works only if you understand the following matters:

Availability of various accounting information is generally good and you can

easily access them. Sometimes you will need to do some adjustments resulting
from supporting data and it would be lovely if you could get all pieces of info in
the blink of an eye.
You will stay cool, no nerves, no stress, just patience and concentration on this
lovely work.

PREPARE-GATHER BASIC DOCUMENTS AND DATA

In order to start, you shall obtain at least the following documents:

balance sheet (statement of financial position) as at the end of the current

reporting period (closing B/S) and as at the beginning of the current reporting
period (opening B/S)
statement of comprehensive income (profit or loss statement + statement of other
comprehensive income if applicable) for the current reporting period
statement of changes in equity for the current reporting period

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 statement of cash flows for the previous reporting periodwell, you can proceed
further without this, but its good source of potential recurring adjustments in the
current period
information about material transactions in your company during the current
reporting period. Of course, you can adjust your statement of cash flows also for
immaterial items, but it would not significantly change the information value of
cash flow statement (since its immaterial, but careful about aggregation), so I
would not bother about it

The first four bullets are crystal clear, but what sources of information about material
transactions to use? Here is the short list of my ideas what to look for:

major contracts that your company entered into during and before the end of the
reporting period (lease, rental, hedging, constructionall sorts of)
minutes or memoranda from the meetings of managing bodies in your company,
like board of directors meetings, supervisory board meetings, shareholders
meetings, audit committee meetings, etc.
files from your legal department related to any proceedings against your company
(and the opposite cases, too)
documents from your investment/long-term assets department to look for major
purchases, sales, exchanges and other transactions with fixed assets

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 Thats just a general shortlist and I am sure you know better what kind of transactions
might be significant in your companyso go, ask and look for where you think
its appropriate.

CALCULATE CHANGES IN THE BALANCE SHEET

Now, take the closing and opening B/S and make a simple table with 3 columns: the
first column title of caption in B/S (for example, tangible non-current assets), the second
columnbalance of this caption from the closing B/S and the third columnbalance of this
caption from the opening B/S. As you sure know, each B/S has 2 parts assets and equity &
liabilities. Ideally, totals of both parts should be the same, right? So when you do this simple
table, please, enter assets with + sign and equity & liabilities with - sign. Now do the
check if you entered the signs and numbers correctly, total of all assets and equity &
liabilities should be 0 (dont include subtotals).

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 In the 4th column, calculate changes in the balance sheet over the current period. Use
simple formula: opening B/S minus closing B/S (careful, not the vice versa!). When you
calculate all the changes correctly, total of all changes will be 0 (again, dont include
subtotals). Just let me add that you can use your general ledger accounts instead of balance
sheets and you will get greater details as balance sheet represent aggregated figures. It really
depends on the level of details you need.

CONCLUSION

Lets assume that by now you have done a lot of work, made a lot of adjustments,
verified movements in material B/S items, your totals are always 0. In this stage, finishing
your cash flows is a piece of cake. What do you have in front of you? Huge excel file with 1st
column being the headings and titles of your statement of cash flows, 2nd column being the
changes in balance sheet and 3rdxth columns being individual adjustments. Now its time to
draw the last column. And you guessed ityour last column will be the statement of cash
flows itself. In the individual lines or items from statement of cash flows, you shall make
horizontal or line totals, or in other words, sum up the numbers from columns 2 to x. You
effectively calculate the change in the balance sheet for the individual caption adjusted by
non-cash items, that gives you the appropriate cash movement for that caption.

Fine. Then verify if it makes sense. For example, you will get certain number in the
line purchases of PPEgo and verify this number with your accounting records, or ask
your investment department whether cash payments for PPE during the period were as you
calculated. If not even close to thatyou must have omitted something, or messed up signs
or you made some other mistake.

REFERENCES

http://accountlearning.blogspot.in/2010/04/concept-of-cash-flow-statement.html

http://www.yourarticlelibrary.com/accounting/cash-flow/objectives-of-cash-flow-

statement-top-8-objectives/59518/

http://www.ifrsbox.com/how-to-prepare-statement-of-cash-flows-in-7-steps/