Statement of Cash Flow

In last article we have seen the basics of  Cash Flow Analysis.In this article we will see how cash flow statement will work out.

The preparation of cash flow statement involves the following steps

• Calculations of cash flows  related to operation .
• Calculation of cash flows on account of other transactions

CASH FROM OPERATION.

1. When all transaction are cash transactions:- In this case the net profit is equal to net cash from operation

Net cash from operation = Net profit.

2. When all transaction are not cash transaction:- Under such circumstances the net profit made by a firm can not generate equivalent amount of cash.Here some of the non cash transaction are credit sales,credit purchases,opening and closing stocks,etc.

By considering the non cash transaction we can calculate the Cash from operation by following formula.

Cash From Operation=Net Profit  + Decrease in current assets+ Increase in current liabilities – Increases in current assets – Decrease in current liabilities.

Calculation of operating profit

In case of profit or loss disclosed by the p & l account includes non operating incomes e.g dividend,rent,or non operating expenses e.g compensation,then this are first deleted from or  added to the profit respectively to get operating profit and then cash from operation is calculated by taking in to consideration the increase or decrease in current assets and current liabilities.Non operating incomes and non operating expenses are shown separately as inflow and out flows of cash respectively.

Deleting the effect of non cash items

It is often seen that quite a few expenses do not results in out flow of cash e.g  depreciation   on fixed assets, goodwill ,trade mark patent right  ( amortization of intangible assets ) etc Under such circumstances cash generated by the firm is more than the profit made by the firm during the year.So in order to find out cash generated from the operation these items are to be added back to the profit made during the year.

Gains on sales of fixed assets :- It is taken in to credit side of  P  & L  account .Thus it will increase the profit made during the year.So for calculating cash generated from operation this item will be deducted from profit made during the year.In case of loss on the sales of fixed assets will be added in the profit to get cash generated from operation.