Generally a cash flow statement is prepared-for a particular period or for a financial year.
Balance sheet and income statement are the sources of information. Collected information from these two statements are grouped into three parts in the cash flow statement.
Net cash inflow and cash outflow for a particular period or for a financial year can be known from the cash flow statement.
Closing cash balance is determined adding opening cash balance to net cash inflow. The three parts – contain with which cash flow statement is prepared are;
- Cash flow from operating activities,
- Cash flow from investing activities, and
- Cash flow from financing activities.
The techniques of ascertaining missing figures of three parts of cash flow are discussed below;
- Cash flow from operating activities: Cash flow from operating activities means inflow and outflow of cash through business activities. Inflow of cash mainly depends on sales and out flow of cash depends on expenses of business.
- Cash collection: Cash receipts or cash collection are related to cash flow from operating activities.Since cash collection is not directly mentioned in the problem it is ascertained through adjustment of various accounts.In this case cash collection is determined adding opining receivables with net sales of the year and subtracting closing receivables there from. Besides, other incomes, if any are also added with it.For example,sale of scraps, interest on investment etc.
- Cash payment: In this case total of various expenditure other than depreciation expense is added to cost of goods sold to determine the total amount of cash payment.
- Increase-decrease of current assets and current liabilities: In this case the difference between current assets and current liabilities of current year and past year is accounted for.Adjusting the above mentioned three steps cash inflow or cash outflow from operating activities is determined.
- Cash flow from investing activities: Cash inflow or cash outflow for a particular period is determined from inflow and outflow of fixed assets of a business concern. In this case generally cash outflow is marked.
- Cash flow from financing activities: Financing is made for carrying out overall activities of a business.The amount of inflow of cash from financing for a particular period or year is determined.Cash inflow or cash outflow is determined taking into consideration sale of new shares in the market, payment of dividend, taking long term loan, redemption of bonds etc.
Net result of cash inflow and cash outflow for a particular period of a business can be known from the above-mentioned three steps.
Closing balance of cash is determined adding opining cash balance to net cash flow.
If the determined closing cash balance equals with closing cash balance as shown in the balance sheets it is assumed that cash flow statement is correct.