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Steps in Preparation of Cash Flow Statement

Cash flow statement can be prepared on the same pattern on which fund flow statement is prepared. But here statement of changes in working capital does not need to be prepared. Remaining all other procedures was same in fund flow statement.

Cash flow statement is prepared on any one of the following assumptions:

–          When all transactions are taken as cash transactions.

–          When all transactions are not cash transactions.

Here we have to proceed with all the problems by treating all the transactions as cash transactions.

Steps

  1. No need to prepare working capital statement
  2. Preparation of cash flow statement
  3. P,.reparation of profit & loss account-computation of cash from operation
  4. Preparation of separate ledger if necessary
  5. Treatment of adjustments 

1. No need to prepare the working capital statement

Changes in current assets and current liabilities are adjusted in the cash flow statement itself. So separate statement is not necessary for the changes in working capital.

2. Cash Flow Statement (Proforma)

 

3. Preparation of Profit & Loss Account Computation of cash from operation

Cash from operations can be found out in two methods. One is statement form another one is preparation of profit and loss account. Normally, cash from operation can be found out with the help of the preparation of profit and loss account because it is an easy and convenient method. Here profit and loss account is prepared in usual procedure.

Profit and Loss A/c

Dr.                                                                                                                                                                                             Cr.

 

4. Preparation of Separate Ledger

If information of any particular assets or liabilities are given in the adjustment, we have to prepare separate asset or liabilities account. Balances from this ledger can be transferred to cash flow statement.

5. Treatment of adjustments

The additional information which are given apart from the balance sheet are, simply called as adjustment. All the adjustments will appear in two places. The following are the important adjustments and their treatment.

 

(a) Dividend paid                    – Cash flow statement – outflow side

– Profit & loss Ale – Debit side

(b) Depreciation                      – P.L.A/c- Debit side

(c) Loss on sale of                   – P.L.A/c – Debit side

Assets                                                  Respective asset A/c – credit side

(d) Income Tax                       – P.L.A/c – Debit side

Provision                                             Income Tax – Credit side.

NOTE : The adjustments applicable for fund flow statements will also be applicable for cash flow statements.

 

TEST QUESTIONS 

  1. What is meant by cash flow statement ?
  2. How will you prepare the cash flow statement ?
  3. What is the purpose of preparing cash flow statement ?
  4. What are the differences between cash flow and fund flow statement ?
  5. Explain the advantages of cash flow statement.
  6. What are the limitations of cash flow statement ?