Preparation of Cash Flow Statement

Preparation of Cash Flow Statement
The following is the step by step method of preparation of a cash flow statement.
Step 1: Calculate the net increase or decrease in cash and cash equivalents: For this purpose the opening balance of total cash and equivalents is compared with the closing balance of cash and equivalents. The net increase or decrease is the figure which is to be explained by the cash flow statement.

Step 2: Net cash from operating activities: The term operating activities means the normal business transactions relating to goods and services being traded by the firm. On the basis of the information contained in the comparative balance sheet and the income statement, the net cash flow generated or used by operating activities may be ascertained.

Step 3: Calculation of cash provided by financing and investment activities: All other items (except the current accounts as it has been considered in Step 2), are analysed in the light of additional information to find out the resultant cash flow, if any. So, different items and information are classified into financing and investment activities.

Step 4: Preparation of cash flow statement: On the basis of information collected and calculations made in the above steps, now the cash flow statement is prepared. The net cash flow provided by operating activities, financing activities and investment activities is equal to the net change in cash and equivalents.

Step 4: Other items: If there is any other investment or financing transaction that has not been covered in the three steps above, should be disclosed in the cash flow statement, e.g., there may be a purchase of an asset by issue of capital or debenture. This transaction will not find a place in the usual cash flow statement but must be disclosed to make the cash flow statement a useful and a meaningful document.