Cash Flow Statement : Methods, Preparation Pocedures

Cash flow statements is the overall movements of cash inflows and uses of cash outflows of the business concern during a particular period of time. Cash Flow statements comprise as Operating Activities, Investing Activities and Financing activities and reconcile them with changes in its cash and cash equivalents.

International Accounting Standards issued IAS – 7 to prepare cash flow statement and advised two methods i.e. Direct and Indirect to prepare Cash flow statements where Indirect method is recommended to prepare cash flow statement.

Methods of Cash Flow Statement

Methods of Cash Flow Statement

IAS 7 recommended two methods for preparation of Cash flow statements. These two methods are:

  • Direct Method
  • Indirect Method

Indirect methods are the most popular method.

Direct Method:

Format Of Cash Flow Statement

(Using Direct Method)

For the year ended 31st December’2018

Cash Flows from Operating Activities:
Cash Received from Customers****
Cash Paid for Merchandise(***)
Cash Paid to Employee(***)
Cash Paid for Interest(***)
Cash Paid for Income Taxes(***)
Net Cash Provided by Operating Activities****
Cash Flows from Investing Activities:
Purchase of Property and Equipment(***)
Net Cash used in Investing Activities(***)
Cash Flows from Financing Activities:
Proceeds from Line of Credit****
Payments on line of credit(***)
Proceeds from Long Term Debt****
Payments on long term debt(***)
Net Cash Used in Financing Activities***
Net increase/(Decrease) in Cash ***
Beginning Cash Balance***
Ending Cash Balance***

Indirect Method:

Activities of Cash Flow Statement

The activities of cash flow statements comprised as:

  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows financing activities

Details of above activities are as follows:

A) Cash flows from Operating Activities:

Operating activities consists of production, sale and delivery company products to the customers as well as collecting payment from its customers.

As per IAS 7, following items are to be included in operating cash flows:

  • Cash receipts from the sales of goods and rendering of services
  • Cash receipts from royalties, fees, commissions and other revenue
  • Cash payments to suppliers for goods and services
  • Cash payment to employees
  • Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits
  • Cash payments or refunds of income taxes unless they are treated as financing and investing activities
  • Cash payments and receipts from contracts held for dealing or trading purposes

Points to be noted that in indirect method following items to be added back-to the net income to calculate cash flows from operations:

  • Depreciation
  • Deferred tax
  • Amortization
  • Any gains or losses associated with the sale of non-currents assets.
  • Dividends received

Cash Flows from Operating Activities

(Using Direct Method)

Cash Receipts from Customers***
Cash Paid to Suppliers(***)
Cash Paid to Employees(***)
Cash Paid for other Operating Activities(***)
Interest Paid(***)
Income Tax Paid(***)
Net Cash from Operating Activities****

Cash Flows from Operating Activities      

                                                     Using Indirect Method

Profit before interest and income taxes      ****
Add back Depreciation***
Add back impairment of assets      ***
Increase in receivables          (***)
Decrease in inventories          ***
Decrease in Trade payable ***
Interest paid ( Total Interest less accrues interest) (***)
Income Taxes Paid (***)
Net Cash from Operating activities ****

B) Cash flows from investing activities:

Investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents.

Items included in investing activities:

  • Payment made to acquire property, plant and equipment, intangibles and other long term assets. Capitalized development costs and self constructed PPE will also be included.
  • Cash received from sale of non-current assets

C) Cash flows from Financing activities:

Financing activities include cash flow from investors against their equity participation, borrowings from banks, dividend paid to shareholders etc.

Items included in Financing activities:

  • Proceeds received from issuing of shares or other equity instruments
  • Payments made to owners to acquire or redeem the shares of company
  • Proceeds received against issuing of debentures, loan, notes, bonds and other short term and long term financing.
  • Installment of loan paid
  • Lease liability paid by lessee against outstanding liability relating to a finance lease.