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Statement Of Cash Flows

Statement of Cash Flows Assignment / Homework Help
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.

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.

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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