Statement of Cash Flows

Appendix 6- Introduction to preparation of the

Statement of Cash Flows
 Cash Flow Statement
Flow statement
Periodic
Provides information regarding the liquidity of a firm
explains the reasons for increase or decrease in cash balance
from one balance sheet date to the next
classifies the reasons for the change as an operating, investing
or financing activity.
amount of net income in a period is usually different than the
amount of increase in cash in the same period
reconciles net income with cash flow from operations.
 Classification of Cash Flows

Operations -- cash flows related to selling goods and

services; that is, the principle business of the firm.
Investing -- cash flows related to the acquisition or sale of
noncurrent assets.
Financing -- long term and short term cash flows related
to liabilities and owners equity; dividends are a
financing cash outflow.
What is Cash?
Cash includes cash and cash equivalents
Cash equivalents:
treasury bills maturing in 90 days or less;
investment funds;
foreign currency on hand;
checking account and free savings account
External Uses of CFS
To assess the ability of a firm to manage cash flows
To assess the ability of a firm to generate cash
through its operations
To assess the companys ability to meet its
obligations and its dividend policy
To provide information about the effectiveness of
the firm to convert its revenues to cash
To provide information to estimate or anticipate the
companys need for additional financing
Internal Uses of CFS
Along side with cash budget CFS is used:
To assess liquidity
Determine if short-term financing is necessary

To determine dividend policy

Decide to distribute; or increase or decrease

To evaluate the investment and financing

decisions
Cash flow from operating
activities
cash received from customers through sale of
goods or services performed;
cash received from non-operating activities such
as dividends from investments, interest revenue,
commissions, and fees;
cash payments to suppliers or employees;
cash payments for taxes and other expenses;

In effect, the income statement is changed from

accrual basis to cash basis
Investing Activities
Examples of investing activities include:
cash payments to acquire property, plant, and equipment
(PPE), other tangible or intangible assets, and other long-term
assets; and sale of such assets
loans extended to other companies; and collection of such
loans;
Financing Activities
Examples of financing activities are :
cash received from issuing share capital;
cash proceeds from issuing bonds, loans, notes,
mortgages and other short or long-term borrowings;
cash repayment of loans and other borrowings; and
cash payments to shareholders as dividends.
 Classification of Cash in-flows and outflows
From sales of goods and To wages salary
services to customers payments
From receipt of customer To suppliers for
advances purchases of inventories
Operating Activities
From receipt of interest To other operating
revenue or dividends or expenses
rent revenue or similar To interest payments
revenue items To tax payments
To advance payments to
suppliers
From sale of PPE and other To purchase PPE and
long-term assets other long-term assets
Investing Activities
From collection of loans To make loans and to
collect such loans

From sale of common or

preferred stock Financing Activities To repay debt
From issuance of short To pay dividends
or long term debt
 Net Profit xxx
Format
Add of the Cash FROM OPERATION
Depreciation xxx
Good will written off xxx
Loss on sale of fixed assets/Investment xxx
Discount on debentures written off xxx
Provision for tax/ xxx
dividend/depreciation
Prelim expenses written off xxx
Transfer to General reserve xxx
Increase in Current Liability xxx
Decrease in Current Asset xxx xxx
Less:
Profit on sale of fixed assets xxx
Income tax refund xxx
Income from Investment xxx
Dividend received xxx
Increase in Current Asset xxx
Decrease in Current Liability xxx xxx
(+) Cash from operation (or) XXX
Cash flow statement
Cash Flow Statement
Opening balances
Cash XXX
Bank balance XXX XXX
Add: cash Inflows
Cash from operations XXX
Issue of shares XXX
Issue of debentures XXX
Sale of fixed assets XXX
Sale of Invetsment XXX
Long term loans XXX XXX
Total: Cash Available XXX
Less: Cash outflows
Cash out flow of operation XXX
Redemption of Pref shares XXX
Redemption of debentures XXX
Loan repaid XXX
Tax paid XXX
Dividend paid XXX
Total: Application of Cash XXX
Closing balances:
Cash XXX
Bank balance XXX XXX