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Statement of Cash Flows
While earning profit is an important objective of any enterprise, equally vital
information that any user of financial statement requires is to know how the enterprise
generated cash from its business and where was it expended. The Cash Flow Statement
or Statement of Cash Flows provides this information to the users of financial statements.
A cash flow statement is a financial statement that provides information about the
cash flows (incoming and outgoing) of an enterprise during a period of time. It
offers particulars of cash receipts and payments during a period and the net accretion
/ erosion to cash balance of the enterprise during the period.
The basic objective of the statement is to provide the users with a basis to assess
the ability of the enterprise to generate cash as the economic decisions taken by
the users require an evaluation of the enterprises’ ability to generate cash from
its activities.
A cash flow statement is divided into three parts to identify and better categorize
the cash flow information into relevant and informative sections for the users of
the statement. The cash flow statement reports cash flows during the period by operating,
investing and financing activities.
- Operating activities are the principal revenue producing activities of an enterprise.
- Investing activities are the acquisition and disposal of long term assets and other investments.
- Financing activities are activities that result in changes in the size and composition of owner’s capital and borrowings of the enterprise.
There are two methods of reporting cash flows from operating activities – Direct
and Indirect method. Note that the investing and financing section of the cash flow
statement remain same irrespective of the method chosen to present the cash flows
from operating activities.
In direct method of reporting cash flows from operating activities, major classes
of gross receipts and payments are reported.
In the indirect method, the net profit or loss of the enterprise as disclosed in
its income statement is adjusted for non-cash transactions and transactions that
are classified as from investing and financing activities. The resultant figure
is further adjusted with the effects of changes during the period in current assets
and liabilities of the enterprise.
CASH FLOW STATEMENT
For the year ended 31 December 2009
(Direct method)
For the year ended 31 December 2009
(Direct method)
|
|
|
| Cash flow from operating activities | |
| Cash receipts from customers | $125,000 |
| Cash payment to vendors and employees | ($110,000) |
| Cash generated from operations | $ 15,000 |
| Income taxes paid | $ 12,000 |
| Cash flow from operating activities | $ 3,000 |
|
|
|
| Cash flow from investing activities | |
| Purchase of property, plant and equipment | ($250,000) |
| Proceeds from sale of property, plant and equipment | $125,000 |
| Interest / Dividends received | $ 25,000 |
| Cash flow from investing activities | ($100,000) |
|
|
|
| Cash flow from financing activities | |
| Issue of share capital | $100,000 |
| Proceeds from borrowings | $125,000 |
| Repayment of loans and borrowings | ($200,000) |
| Interest / Dividends paid | ( $20,000) |
| Cash flow from financing activities | $ 5,000 |
|
|
|
| Net increase / (decrease) in cash and cash equivalents | ($ 92,000) |
|
|
|
| Cash and cash equivalents at the beginning of the period | $ 137,000 |
|
|
|
| Cash and cash equivalents at the end of the period | $ 45,000 |
As indicated earlier, under the indirect method of preparing cash flow statement,
the presentation of cash flows from investing and financing activities would remain
the same as in the direct method. Presented below is the Operating activities section
of cash flow statement under indirect method.
CASH FLOW STATEMENT
For the year ended 31 December 2009
(Indirect method)
For the year ended 31 December 2009
(Indirect method)
|
|
|
| Net profit before tax | $ 35,000 |
| Adjustments for: | |
| Depreciation | $ 15,000 |
| Interest and dividend income | $ 12,000 |
| Interest expense | ($ 15,000) |
| Operating profit before working capital changes | $ 47,000 |
|
|
|
| Working capital changes: | |
| Increase in accounts receivable | ($12,000) |
| Decrease in inventories | $ 8,000 |
| Increase in accounts payable | $ 2,000 |
| Decrease in provisions | ($25,000) |
| Cash generated from operations | $20,000 |
| Less: Income tax paid | ($17,000) |
| Cash flow from operating activities | $ 3,000 |
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