Question

What is cash flow statement? How is it prepared?? (5 marks)​

Answer 1

Answer:

A cash flow statement of a company lays down an organisation's total fund inflow in the form of cash and cash equivalents through operational, investment, and financing activities. It also showcases the total cash outflow through the aforesaid activities. In this article [hide] An Introduction to Cash Flow Statement.

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Answer 2

Answer:

Cash flow statement allows you to know how much cash entering and leaving your business. Along with balance sheets and income statements, it's one of the three most important financial statements for managing your small business accounting and making sure you have enough cash to keep operating.

HOW TO PREPARE A CASH FLOW STATEMENT

INDIRECT METHOD-

The indirect method is based on accrual basis accounting—which means revenues and expenses are counted when they are incurred, not when money actually changes hands. Most companies use the accrual basis of accounting method, which is partly why this method is so popular.

For the operating activities section of the cash flow statement, the indirect method involves first showing the company’s net income (which should be found easily on your company income statement). You then show any noncash inflow or outflow adjustments that need to be made in order to calculate the total operating activities cash flow. Common adjustments, for example, include:

-Depreciation (which must be added back to the net income because it does not count as cash flow)

-Accounts payable

-Accounts receivable

-Inventory expenses (which must be subtracted from the net income because they are considered a cash outflow)

-Working capital changes

DIRECT METHOD-

The direct method relies on cash basis accounting—meaning revenues and expenses are counted when actual cash receipts and payments are made during the reporting period.

The direct method generally takes more time and number-crunching because you are subtracting actual cash outflows from inflows rather than simply adjusting the net income. Common line items using the direct method include:

-Customer receipts

-Payments to suppliers

-Payments to employees

-Interest and dividends received

-Income tax payments

While breaking out each type of cash receipt or payment takes time, this method offers more detail and visibility into your company’s finances. For example, it can show how much cash was spent during the reporting period on employee payroll or merchandise—or the exact dollar value of customer sales—rather than having those individual cash flow sources grouped together in “net income.”

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