How to Prepare a Cash Flow Statement, Elements & Methods:UGC-NET Notes

The cash flow statement is a vital financial document that provides insight into the cash inflows and outflows of a business over a specific period. It serves as a crucial tool for assessing a company's financial health and its ability to meet its financial obligations. Understanding how to prepare a cash flow statement is essential for investors, creditors, and management alike, as it offers valuable information about a company's liquidity, solvency, and overall financial performance.

How to prepare trial balance is a very vital topic to be studied for the commerce related exams such as the UGC-NET Commerce Examinations. How to prepare trial balance is one of the most asked topics in accounting and financial management and learners are expected to know this topic in depth.

In this article, the learners will be able to know about the following:

• Cash flow meaning
• Cash flow format
• Cash flow preparation-step by step process

Cash Flow Meaning

Cash flow in simple terms refers to the movement of money into and out of a business. It's like tracking the cash coming in from sales and other sources and the cash going out for expenses, investments, and other needs. Negative cash flow means it's spending more than it's making, which could be a sign of financial trouble. So, cash flow helps businesses keep track of how much money they have available at any given time.

Cash Flow Format

The format of the cash flow statement has been stated below.

How to Prepare a Cash Flow Statement Step by Step

Preparing a cash flow statement involves several steps to accurately report the cash inflows and outflows of a business over a specific period. Here's a step-by-step guide to preparing a cash flow statement:

• Gather Financial Information: Collect the necessary financial documents, including the income statement, balance sheet, and any additional transaction records for the period you're preparing the cash flow statement.
• Determine Cash Flow Categories: Identify and categorize cash flows into three main sections: operating activities, investing activities, and financing activities. Operating activities involve cash flows from the company's core business operations, while investing activities include cash flows related to asset purchases or sales. Financing activities encompass cash flows from borrowing, issuing equity, or paying dividends.
• Calculate Cash Flow from Operating Activities: Start with the net income from the income statement and adjust it for non-cash items such as depreciation and amortization. Then, account for changes in working capital, including changes in accounts receivable, accounts payable, and inventory. Add back any non-operating expenses or subtract non-operating income. This calculation yields the net cash provided by operating activities.
• Calculate Cash Flow from Investing Activities: Identify cash flows related to investing activities, such as purchases or sales of property, plant, and equipment, as well as investments in securities or other businesses. Subtract cash outflows for asset purchases and add cash inflows from asset sales to determine the net cash used in or provided by investing activities.
• Calculate Cash Flow from Financing Activities: Identify cash flows related to financing activities, such as proceeds from borrowing, repayments of debt, issuance of equity, and payment of dividends. Subtract cash outflows for debt repayments and dividend payments and add cash inflows from borrowing or equity issuance to determine the net cash provided by or used in financing activities.
• Summarize Cash Flows: Summarize the net cash flows from operating, investing, and financing activities to calculate the net increase or decrease in cash for the period. This figure represents the change in the company's cash balance during the period.
• Reconcile Cash Flow Changes: Compare the net increase or decrease in cash with the beginning and ending cash balances from the balance sheet to ensure accuracy and consistency.
• Prepare the Cash Flow Statement: Organize the cash flow information into a formal cash flow statement format, including the three main sections: operating activities, investing activities, and financing activities. Provide a clear presentation of the cash inflows and outflows for the period.
• Review and Analysis: Review the prepared cash flow statement for accuracy and completeness. Analyze the cash flow patterns to assess the company's liquidity, solvency, and financial performance. Consider any significant changes or trends that may impact future cash flows.
• Finalize and Distribute: Finalize the cash flow statement and distribute it to relevant stakeholders, such as investors, creditors, and management. Use the information to make informed decisions regarding investment, lending, and strategic planning.

Conclusion

In conclusion, the cash flow statement is an indispensable financial statement that complements the balance sheet and income statement, providing a comprehensive view of a company's financial position. By analyzing the sources and uses of cash, stakeholders can make informed decisions regarding investment, lending, and strategic planning. Proper preparation and interpretation of the cash flow statement are essential for assessing a company's liquidity, solvency, and long-term viability.

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