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
bikaner 334001 rajasthan, india
www.afterschoool.tk
mobile : 91+9414430763
5 DECEMBER 09 www.afterschoool.tk 1
What is cash flow ?
Flow of cash means, where is the cash going

out or where from cash is coming in
How to prepare cash flow ?
Identify resources, where cash has been used...

for example : building in the beginning of the
year was 2000, now it is of 5000, it means you
have spend Rs. 3000 on new building, thus
cash has flown outside for purchase of building
How to prepare cash flow
statement?
Identify each asset, find its closing balance for

this year and for the last year and find the
difference, this will tell you about flow of cash.
If the assets have increased, probably cash has
flown outside (you have paid cash), if assets
have decreased, probably you have sold them
(cash has flown in).
Liability – source of cash
Assets consume cash, but liabilities give cash.

If equity has increased, it means, cash has
increased. Loans have increased, it means, cash
has increased. Whenever there is an increase in
liability, there is an increase in cash.
Find out cash profit...
All your profit is not cash profit. Some of the

profit is from non-cash transactions - which
has to be excluded from profit.
Thus you have two options, - 1. prepared
adjusted profit and loss account or 2. prepare a
fresh p&l account taking into account only
cash transactions.
How to prepare cash flow
statement?
Classify cash flows in three types

1. cash flow from operating activities
2. cash flow from investing activities
3. cash flow from financing activities.
cash flow from operating
activities
These include day to day business activities.

Some of them will give cash, some of these
will require cash.
Activities can be classified into two types :
1. activities that give cash inflow
2.activities that generate cash outflow
Operating activities with cash
inflow
Cash sales (dont take credit sales )

interest received
fees received
other payment received.
Operating activities with cash
outflow
Cash purchase (dont include credit purchase,
for which you have not paid yet)
wages paid
salaries paid
rent paid
postage paid
administrative expenses paid
sales exp. Paid etc.
Cash from operating activities...
Direct method : here you list down all the

activities involving cash inflow and cash
outflow and find the net difference, this is
called cash profit.
Indirect method : here you take profit from P&
L account and then adjust it for non-cash items.
Cash from investing activities.
Those activities which require investments,

they are of two types :
1. investment activities with cash inflow
2. investment activities with cash outflow
investment activities with cash
inflow
Examples :
sale of building
sale of machinary
sale of furniture
sale of investments
dividend / interest received on investments
investment activities with cash
outflow
Examples :
purchase of building
purchase of machinary
purchase of furniture
purchase of investments
purchase of plant
purchase of other assets..
Cash flow from financing
activities
Financing refers to equity, loans, debts, etc,
which give money for running business.
Investing activities were related to assets of the
company, financing is related to long term
liabilities of the company.
They are of two types:
1. financing activities with cash inflow
2.financing activities with cash inflow
financing activities with cash
inflow
Cash inflow from equity

cash inflow from loans / debentures / bonds
cash inflow from borrowing from relatives
cash inflow from preference shares
financing activities with cash out-
flow
Here you are making payments for the sources
of long term cash :
1. redemption of debentures
2. redemption of preference shares
3. payment of loans
4. payment of other long term liabilities.
5. interest payment on loans / dividend on
equity
CASH FLOW STATEMENT
It shows the total payments received or paid in
three categories :
operating
financing
investing
cash flow statement helps you in identifying
the flow of cash and it helps you in cash
planning
How to classify cash flow ?
Look into the nature of cash transaction and

identify the cash flow and its implication.
If dividend has been received : it is cash inflow
from investing activities
if dividend has been paid : it is cash outflow
from financing activity
Be careful about non-cash
transactions...
Exclude following from your reports :

depreciation, provisions, bad debts, drawings
of goods, and all those transactions, which dont
have cash flow ...
Example :
p la n t 100 120
d e b to rs 1 2 0 1 0 0
c re d it o rs 1 2 0 1 0 0
p ro f it
Balances of a 100 140
company show :the following
record :
Analysis :
Cash flow from financing : (equity : 20, debt :

20)
cash flow from investing : (building : -20, plant
: -20 )
cash flow form operating: (debtors :-20,
creditors : 20, cash profit : 40)
thus net cash flow is only Rs. 40.
Simple rules to remember ????
When assets increase, cash outflow takes place
when current assets increase, cash outflow take
place
when liabilities increase, cash inflow take
place
when current liabilities increase, cash inflow
take place
exclude non-cash transactions (like exchange
of building against equity)
Prepare cash flow from operations
Information of 2008 and 2009 : BR (80,60),

Stock (200,300), Debtors (400,350), Prepaid
exp. (90,80), Acrued income (80,70), Creditors
(200,220), Outstanding exp. (60,75), BP
(70,60), Cash (100,150), Income received in
advance (8,10), Overdraft (50,60), Profit of
2009: 150.
Funds from operations :
Profit : 150
Adjust : Outstanding exp + 15, Prepaid exp. +
10, Acrued income +10, Creditors +20 income
recd. In advance +2 BP – 10 Debtors + 50
Stock -100 BR + 20
=167
Prepare cash from operations :
Information (2009) : Profit : 1500, Loss on

sale of fixed assets : 100, Depreciation : 90,
Preliminary Exp. Written off : 50, Provision
for tax : 100, Transfer to reserve : 100,
Intangible assets written off : 50, Discount on
issue of shares written off : 10, Gain on sale of
fixed assets : 200,
Solution....
Profit : 1500 :
adjust : Loss on sale of fixed assets : + 100,
Depreciation + 90, Preliminary exp. + 50,
Prov. For tax : + 100, Profit transfer to reserve
+ 100, Intangible assets written off : + 50,
Discount on issue of shares written off :: + 10,
Gain on sale of fixed assets : - 200
= 1500+300 = 1800 answer
Prepare cash flow statement
Information in (2008,2009) : Share (200, 300) Premium

(0,10), Preference share (100,50), 15% debenture (150,
250), Reserve (100,250), current liabilites (50,80), fixed
assets (400,650), Investment(30,50), Cash (30,42.5),
Current assets (120,160), Discount on Debentures (20,15)
Preference share premium paid in 2009@ 5%, Interim
dividend paid 30, Machine of book value 50 was sold for
30 in 2009. Dep. Charged 50. debentures issued at 10%
discount
Cash from operations :
Profit : 150
Adjust : Depreciation : +50, Loss of sale of
assets : + 20, current liabilities : + 30, current
assets – 40 , dividend + 30 Premium preference
share paid : +2.5, discount on debenture +15
=257.5
Cash flow statement
Cash flow from Investment
purchase of fixed assets -350, investment – 20,
sale of machine : + 30
total : - 340
Cash flow from Financing
capital : +110, Debentures +90, Preference
share : -52.5, Dividend : - 30, Interest on
debentures : -22.5 total = 95
Fixed assets account
Closing balance : 650

add depreciation +50, add sale + loss 50,
less opening balance 400
purchase = 350
Cash Account
Opening cash : 30
add cash from financing : 95
less cash for investing : 340
add cash from operations + 257.5
closing balance = 42.5
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How To Prepare Cash Flow Statement

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HOW TO PREPARE CASH FLOW

Flow of cash means, where is the cash going

Identify resources, where cash has been used...

Identify each asset, find its closing balance for

Assets consume cash, but liabilities give cash.

All your profit is not cash profit. Some of the

Classify cash flows in three types

These include day to day business activities.

Cash sales (dont take credit sales )

Direct method : here you list down all the

Those activities which require investments,

Cash inflow from equity

Look into the nature of cash transaction and

Exclude following from your reports :

Cash flow from financing : (equity : 20, debt :

Information of 2008 and 2009 : BR (80,60),

Information (2009) : Profit : 1500, Loss on

Information in (2008,2009) : Share (200, 300) Premium

Closing balance : 650

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