How To Prepare Cash Flow Statement?

Updated on: May 17th, 2021 - 9:30:53 AM

15 min read

social iconssocial iconssocial iconssocial icons

As prescribed by the Accounting standard -3, there are two methods which can be used to prepare cash flow statements:

  • Indirect method
  • Direct method

Whichever method be used, the end result under all three activities i.e. operating, investing and financing will be the same.

Preparation under Indirect method

Operating Activities

The cash flow from operating activities are derived under two stages;

  • Calculating the operating profit before changes in working capital
  • The effect of changes in working capital

Stage 1: Operating profit before changes in working capital can be calculated as follows:

Net profit before Tax and extra ordinary Itemsxxx 
Add: Non-cash and non-operating Items which have already been debited to profit and Loss Account like;
Depreciationxxx
Amortisation of intangible assetsxxx
Loss on the sale of Fixed assetsxxx
Loss on the sale of Long-term Investmentsxxx
Provision for taxxxx
Dividend paidxxxxxx
Less: Non-cash and Non-operating Items which have already been credited to Profit and Loss Account like
Profit on sale of fixed assetsxxx
Profit on sale of Long term investmentxxxxxx
Operating profit before working Capital changesxxx

Stage 2: Effect of changes in Working Capital is to be taken into as follows:

  • Current Assets
    • An increase in an item of current assets causes a decrease in cash inflow because cash is blocked in current assets
    • A decrease in an item of current assets causes an increase in cash inflow because cash is released from the sale of current assets
  • Current Liabilities
    • An increase in an item of current liability causes a decrease in cash outflow because cash is saved
    • A decrease in an item of current liability causes an increase in cash outflow because of payment of the liability

Thus, in a nutshell

Cash from operating activities = Operating profit before working capital changes + Net decrease in current assets + Net Increase in current liabilities – Net increase in current assets – Net decrease in current liabilities

Investing Activities

The cash flow from investing activities is derived by adding all the cash inflows from the sale or maturity of assets and subtracting all the cash outflows from the purchase or payment for new fixed assets or investments.

Cash flow arising from Investing activities typically are:

  • Cash payments to acquire Fixed Asset
  • Cash receipts from disposal of fixed asset
  • Cash payments to acquire shares or debenture investment
  • Cash receipts from the repayment of advances and loans made to third parties

Furthermore, Examples of Cash inflow from investing activities are:

  • Cash sale of plant and machinery, land and Building, furniture, goodwill etc
  • Cash sale of investments made in the shares and debentures of other companies

Cash receipts from collecting the Principal amount of loans made to third parties

Examples of Cash outflow from investing activities are:

  • Purchase of fixed assets i.e. land, Building, furniture, machinery etc
  • Purchase of Intangible assets i.e. goodwill, trademark etc
  • Purchase of shares and debentures
  • Purchase of Government Bonds
  • Loan made to third parties

inline CTA
File your returns in just 3 minutes
100% pre-fill. No manual data entry

Financing activities

Cash flows from financing activities are the cash paid and received from activities with non-current or long-term liabilities and shareholder’s capital.

Cash flow arising from Financing activities typically are:

  • Cash proceeds from the issue of shares or other similar instruments
  • Cash proceeds from the issue of debentures, loans, notes, bonds, and other short-term borrowings
  • Cash repayment of the amount borrowed

Examples of cash inflow from financing activities are:

  • The issue of Equity and preference share capital for cash only
  • The issue of Debentures, Bonds and long-term note for cash only

Examples of cash outflow from financing activities are:

  • Payment of dividends to shareholders
  • Redemption or repayment of loans i.e. debentures and bonds
  • Redemption of preference share capital
  • Buyback of equity shares
Illustration of Indirect method:  
Net profit before Tax and extra ordinary Itemsxxx
Cash flow from Operating activities
Add: Non-cash and non-operating Items which have already been debited to profit and Loss Account like;
Depreciationxxx
Amortisation of intangible assetsxxx
Loss on the sale of Fixed assetsxxx
Loss on the sale of Long-term Investmentsxxx
Provision for taxxxx
Dividend paidxxxxxx
Less: Non-cash and Non-operating Items which have already been credited to Profit and Loss Account like
Profit on sale of fixed assets(xxx)
Profit on sale of Long term investment(xxx)(xxx)
Operating profit before working Capital changes (A)xxx
Changes in working capital:
Add: Increase in current liabilitiesxxx
Decrease in current assetsxxxxxx
Less: Increase in current assets(xxx)
Decrease in current liabilities(xxx)(xxx)
Net increase / decrease in working capital (B)xxx
Cash generated from operations (C) = (A+B)xxx
Less: Income tax paid (Net tax refund received) (D)(xxx)
Cash flow from before extraordinary items (C-D) = (E)xxx
Adjusted extraordinary items (+/–) (F)xxx
Net cash flow from operating activities (E+F) = (G)xxx
Cash flow from Investing activities
Proceeds from sale of fixed assetsxxx
Proceeds from sale of investmentsxxx
Purchase of shares/debentures/fixed assets(xxx)
Net cash from investing activities (H)xxx
Cash flow from Financing activities
Proceeds from issue of sharesxxx
Proceeds from issue of debenturesxxx
Payment of dividend(xxx)
Net cash flow from financing activities (I)xxx
Net increase in cash and cash equivalents (G+H+I) = (J)xxx
Cash and cash equivalents and the beginning of the period (K)xxx
Cash and cash equivalents and the end of the period (J+K)xxx

Preparation under the Direct method

The fundamentals of preparation of cash flow statement under Direct method is more or less same as in Indirect method with only a few exceptions in terms of its presentation.

Illustration of an Indirect method

The Cash flow statement under Direct method is prepared as follows:

Cash flow from Operating activities  
Add: Operating cash receipts: (A)
Cash salesxxx
Cash received from customersxxx
Trading commission receivedxxx
Royalties receivedxxxxxx
Less: Operating cash payments: (B)
Cash purchase(xxx)
Cash paid to suppliers(xxx)
Cash paid for business expenses(xxx)(xxx)
Cash generated from operations (A-B) = (C)xxx
Less: Income tax paid (Net of tax refund received) (D)(xxx)
Cash flow before extraordinary items (C-D) = (E)xxx
Adjusted extraordinary items (+/–) (F)xxx
Net cash flow from operating activities (E-F) = (G)xxx
Cash flow from investing activities (calculation same as under indirect method) (H)xxx
Cash flow from financing activities (calculation same as under indirect method) (I)xxx
Net increase in cash and cash equivalents (G+H+I) = (J)xxx
Cash and cash equivalents and the beginning of the period (K)xxx
Cash and cash equivalents and the end of the period (J+K)xxx

inline CTA
File your returns in just 3 minutes
100% pre-fill. No manual data entry
CONTENTS
;

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption