Cash Flow Statement is a summarized statement containing actual receipts and payments during a given period.
Cash Flow Analysis: Steps involved
1. Calculation of cash flow from operations
2. Calculation of cash flow from investing activities and
3. Calculation of cash flow from financing activities.
It can be prepared either by the direct method or indirect method. Indirect method involves adding back the non-cash items from the net profit and arriving at cash flow from operations.
Example: Following are the comparative balance sheets of a company. Prepare a cash flow analysis.
|
Liabilities
|
2009
|
2008
|
Assets
|
2009
|
2008
|
|
Creditors
|
$15,200
|
$12,800
|
Cash
|
$8,000
|
$12,000
|
|
Equity cap
|
$38,000
|
$36,000
|
Debtors
|
$38,000
|
$31,000
|
|
P & L a/c
|
$7,000
|
$5,800
|
Land
|
$12,400
|
$10,000
|
|
|
|
|
Patent
|
$1,800
|
$1,600
|
|
Total
|
$60,200
|
$54,600
|
|
$60,200
|
$54,600
|
Solution:
Step 1: Calculation of cash flow from operations
Indirect method:
Net income
$1,200 ($7,000-$5,800)
(+):Increase in creditors $2,400 ($15,200-$12,800)
(-): Increase in Debtors $7,000 ($38,000-$31,000)
Net cash flow from operations
($3,400)
Step 2: Calculation of cash flow from investing activities
Purchase of Land
$2,400
Purchase of Patent rights
$200
Net cash flow from investing activities
($2,600)
Step 3: Calculation of cash flow from financing activities
Issue of shares
$2,000
Net cash flow from financing activities
$2,000
Opening balance of cash
$12,000
Therefore, closing balance of cash
$8,000
Closing balance of cash
è
Cash flow from operations or operating activities +
Cash flow from investing activities +
Cash flow from financing activities +
Opening balance of cash.
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