Session 14-15 Preparation and Analysis of Cash Flow Statement

Preparation of Cash Flow Statement are in accordance with Accounting Standard 3 (AS 3) and
has mandated all the organizations to prepare and report the Cash Flow Statement annually.

Cash Flow Statement has the Inflow and outflow of all Cash and Cash Equivalent transactions
and is classified into 3 activities: Operating, Investing and Financing Activities. It does not follow
the basis of accrual.

Operating Activities Investing Activities Financing Activities

• Receipts form Sales or • Purchase and Sale of • Rasing funds by Issuing

Service rendered, fees, Assets adn other shares, bonds, loans
commissions and Investments and debentures.
premium charged.

• Payments for salary, • Dividends received • Interest paid on

raw material, Interest, advances and dividends
Tax. paid.

Operating Activities are recorded using two methods Direct Method and Indirect Method.

Direct Method
 Reports the major sources of cash Inflow and outflow
 Cash Inflows are added and the payments are subtracted
 Is not used often but is preferred by the FASB
Indirect method
 Adjusts the Net Income with the non-cash or non-cash equivalents (Depreciation,
profit/loss made due to sale/purchase of asset)

Example: Case of Chemalite, Inc. (B) Case Reference: HBR 9-495-130

Bennette Alexander, founder of Chemalite, Inc. wondered where the cash was coming and
where it was going , since there was a question of concern to know whether the short term
debt is really required.
The Cash Flow Statement of Chemalite, Inc. has been prepare using Indirect method and is as
below.
 Cash Flow Statement of Chemalite, Inc. for 1992 using Indirect method

1 Operating Cash Flow

Net Income $ 118,995.00
Depreciation and Amortization $ 86,625.00
Deferred Tax $ 26,730.00
Accounts Receivable $ (70,030.00)
Raw Materials Inventory $ (20,450.00)
Finished Goods Inventory $ (104,680.00)
Depreciation of Inventory $ 5,000.00
Prepaid Insurance $ (65,000.00)
Decrease in Taxes Payable $ (950.00)
Gain on Sale of Machines $ (24,250.00)
Net Cash Flow from Operation Activities $ (48,010.00)

2 Investing Cash Flow

Sale Of Old Machines $ 215,500.00
Purchase of New Machines $ (520,000.00)
Purchase of New Production Facility $ (425,000.00)
Net Cash Flow from Investing Activities $ (729,500.00)

3 Financial Cash Flow

Long term debts $ 510,000.00
Short term debts $ 200,000.00
Purchase of Treasury Stocks $ (26,000.00)
Dividends Paid $ (10,000.00)
Net Cash Flow from Financing Activities $ 674,000.00

Opening Cash Balance $ 113,000.00

Net Cash Flow $ (103,510.00)
Closing Cash Balance $ 9,490.00

References:
1. Class Notes
2. Harvard Business Review, Chemalite, Inc. HBR 9-495-130
3. Accountancy: Company Accounts and Analysis of Financial Statements, Chapter 6 Cash
Flow Statement
4. Robert N. Anthony, Accounting: Texts and Cases.