📄 Preparation of Statement of Cash Flows
The Statement of Cash Flows shows how changes in the balance sheet and income statement affect cash and cash equivalents. It categorizes all cash movements into three sections:
- Operating Activities
- Investing Activities
- Financing Activities
✅ Two Methods to Prepare the Cash Flow Statement
| Method |
Description |
Common Use |
| Indirect Method |
Starts with net income and adjusts for non-cash items and working capital changes |
Most commonly used |
| Direct Method |
Lists all cash receipts and payments from operating activities directly |
More detailed, less commonly used |
We’ll focus on the Indirect Method, which is standard in most financial reporting.
🧾 Format: Indirect Method of Cash Flow Statement
A. Cash Flows from Operating Activities
Start with:
- Net Income
Adjust for:
- Non-cash expenses (e.g., depreciation, amortization)
- Non-operating items (e.g., gains/losses from sale of assets)
- Changes in working capital (current assets and liabilities):
- Increase in current assets → Subtract
- Increase in current liabilities → Add
B. Cash Flows from Investing Activities
Include:
- Cash paid for fixed assets (outflow)
- Cash received from sale of fixed assets or investments (inflow)
- Loans made or collected
C. Cash Flows from Financing Activities
Include:
- Issuing shares or bonds (inflow)
- Loan proceeds (inflow)
- Repaying loans (outflow)
- Paying dividends (outflow)
- Buying back shares (outflow)
D. Net Increase/Decrease in Cash
Add totals from A, B, and C.
E. Opening & Closing Cash Balances
Closing Cash=Opening Cash+Net Cash Flow
🔢 Example: Cash Flow Statement (Indirect Method)
Let’s say we’re given the following data:
- Net Income = $40,000
- Depreciation = $5,000
- Increase in Accounts Receivable = $2,000
- Decrease in Inventory = $3,000
- Increase in Accounts Payable = $1,500
- Purchase of Equipment = $10,000
- Sale of Old Vehicle = $2,000
- Loan Taken = $15,000
- Loan Repaid = $5,000
- Dividends Paid = $3,000
- Opening Cash = $20,000
📋 Statement of Cash Flows (Indirect Method)
A. Operating Activities
| Item |
Amount ($) |
| Net Income |
40,000 |
| Add: Depreciation |
+5,000 |
| Less: Increase in A/R |
-2,000 |
| Add: Decrease in Inventory |
+3,000 |
| Add: Increase in A/P |
+1,500 |
| Net Cash from Operating Activities |
$47,500 |
B. Investing Activities
| Item |
Amount ($) |
| Purchase of Equipment |
-10,000 |
| Sale of Old Vehicle |
+2,000 |
| Net Cash from Investing Activities |
-8,000 |
C. Financing Activities
| Item |
Amount ($) |
| Loan Taken |
+15,000 |
| Loan Repaid |
-5,000 |
| Dividends Paid |
-3,000 |
| Net Cash from Financing Activities |
$7,000 |
D. Net Increase in Cash
47,500−8,000+7,000=46,500
E. Closing Cash Balance
Opening Cash=20,000⇒Closing Cash=20,000+46,500=66,500
✅ Summary Table
| Section |
Cash Flow ($) |
| Operating Activities |
+47,500 |
| Investing Activities |
-8,000 |
| Financing Activities |
+7,000 |
| Net Increase in Cash |
+46,500 |
| Opening Cash |
20,000 |
| Closing Cash |
66,500 |
🧠 Key Tips for Preparation
- Adjust net income for non-cash items (like depreciation and gains/losses).
- Track changes in current assets and liabilities to determine working capital changes.
- Clearly separate investing and financing activities.
- Cross-check the ending cash balance with the balance sheet.