STEPS IN THE PREPARATION OF CASH FLOW STATEMENTS - Accounts and Finance for Managers

STEPS IN THE PREPARATION OF CASH FLOW STATEMENTS

Preparation of Adjusted Profit and Loss Account

Preparation of Adjusted Profit and Loss Account

Comparison of Current items to determine the inflow of cash or outflow of cash

Comparison of Current items to determine the inflow of cash or outflow of cash

STEPS IN THE PREPARATION OF CASH FLOW STATEMENTS

Procedure for Preparing Cash Flow Statement

Preparation of cash flow statement

The cash flow statement can be prepared either in statement form or in accounting format.

Preparation of cash flow statement

Illustration

From the following balances you are required to calculate cash from operations:

calculate cash

Cash from operations

According to net profit method, the cash from operation has to be found out Cash from operations
= Net profit (+)decrease in current assets-Increase in current assets

The next step is to quantify the decrease in current assets and increase in current liabilities, in order to add with the closing net profit of the given statements and then the added volume should be deducted from the increase in current assets and decrease in current liabilities.

Illustration

From the following profit and loss account you are required to compute cash from operations

profit and loss account

Illustration

The comparative balance sheets of M/s Ram Brothers for the two years were as follows

comparative balance sheets of M/s Ram Brothers

Additional Information

  1. Net profit for the year 1985 amounted to Rs. 1,20,000
  2. During the year a machine costing Rs.50,000 ( accumulated depreciation Rs. 20,000) was sold for Rs. 26,000. The provision for depreciation against machinery as on 31 Mar, 1984 was Rs.1,00,000 and 31st Mar, 1985 Rs.1,70,000
    You are required to prepare a cash flow statement
    First step is to prepare non current accounts
    Non current account includes both non current liability and asset
    First start with non current liability

Capital A/c

The next step is to find out the depreciation provided during the year, which affects non current asset account of the firm is Machinery account.

Before discussing the accounting transactions, the journal entry for provision for depreciation should be known.

provision for depreciation

Cash sale of the machinery amounted Rs.26,000

What happens during the cash sale of a machinery ?

Debit what comes in - Cash resources are coming in

Credit what goes out- Machinery is going out of the firm

While selling the machinery, it is most important to identify the worth of the sale transaction of the machinery ?

sale transaction of the machinery

Once the loss of the transaction is found out, the amount of the loss should be appropriately recorded

Machinery account

The next step is to prepare adjusted profit and loss account

Land and Building

The next most important step is to compare the current assets
Increase in creditors -Rs.20,000 - cash inflow
Loan from SBI -Rs 50,000 -cash inflow
Decrease in stock -Rs.10,000 - cash inflow
Loan repaid -Rs.1,20,000 -cash outflow
Decrease in Bill payable -Rs.20,000 - cash outflow

Adjusted profit and loss account

Illustration

Data ltd, supplies you the following balance on 31st Mar 1995 and 1996

Additional information

  1. Dividends amounting to Rs 7,000 were paid during the year 1996
  2. Land was purchased for Rs. 20,000
  3. Rs.10,000 were written off on good will during the year
  4. Bonds of Rs.12,000 were paid during the course of the year
  5. You are required to prepare a cash flow statement

The first step is to prepare non current accounts
The first step is to prepare non current assets and liabilities account
As far as non current asset account - Land account has to be prepared

non current asset account - Land account

The non current liability account to be prepared.
The first non current liability account got affected is Share capital account.

Land

The next non current liability account is that Bonds account.

Share Capital account

The next most important step is to compare the current assets during the two years
Increase in Accounts payable - Rs. 2,960 - Cash inflow
Decrease in Inventories -Rs. 7,000 - Cash inflow
Increase in Bank Balance - Rs. 2,400 -Cash outflow
Increase in accounts receivable -Rs. 5,600 - Cash outflow
The next step is to draft the Cash flow statement

Bond Account


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