Question

Describe the different methods that can be used to prepare a statement of cash flows. How are they different?

Answer 1

Cash Flow generated during the period is classified under three heads :-

1. Cash flow from Operating Activities :-These are Principal revenue generating activities of the organisation. ie sale of goods,providing services.

2. Cash Flow from Investing Activities :-These are the acquisition and disposal of long term assets and other investments not included in cash equivalents. Ie, Purchase of Building.

3. Cash flow from Financing Activities :-These are the activities that result in changes in the size and compostion of owners capital and borrowing of enterprise. ie Issue of Shares.

There is two method for calculating cash flow from Operating Activities :-

1. Direct Method :- In Direct Method, Gross cash receipts and gross cash payments are considered.

2. Indirect Method :- In Indirect Method, Net Profit or loss is adjusted for the affect of transactions of a non cash nature , deferrals or accruals of past or future operating cash receipts or payments and, items of income or expense associated with investing or financing activities.

Calculation of cash flow from Investing and financing activities will be same under both method.

Reasons why there may be no cash flow while having profit in income statement :-

1. Acquisition of capital Asset on cash basis.

2. Increase in Current Assets

3. Decrease in Current Laibilities

4. Payment to Vendor on immediate basis.

5. sale to customer on Credit Basis.