Cash flow

Statement of cash flow reflects liquidity position (available cash) of an organisation. Cash is vital for continuing daily operation of an organisation and as well for capital investments.

IAS 7 Statement of cash flow requires companies to prepare statement of cash flow. Statement of cash flow shows how the cash movement took place (i.e. the net changes in cash position = difference in current and previous period cash balance). There are two methods for preparation of cash flow. The “direct method” and the “indirect method”. Companies are free to adopt one of the alternatives. Whichever method is used, statement of cash flow must be presented using standard headings. They are:

Cash flows from operating activities:

Ø  Cash earned from operations: Direct method vs Indirect method

Direct method use ledger balance (i.e. cash sales and cash received from debtors less cash purchase and cash paid to supplier along with other general cash expenses)

Indirect method use information from income statement and financial position (i.e. begins with profit before tax and interest, adds back depreciation and adjust for change in working capital)

Ø  Cash from operating activities: includes interest paid, dividend paid and income tax paid.

Change in working capital – subtract increase in value of current assets (receivable and inventory), add increase in value of current liabilities (payable) and vice versa. The change is the difference in current and previous balance in the statement of financial position.

Cash flows from investing activities: Includes payment made for purchase of property, plant and equipment, proceed received from sales of equipment, interest earned and dividends received.

Cash flows from financing activities: Includes proceeds from issues of shares and debentures and repayment of debentures.

Proforma  for adjustment required for cash flow:

Value of Account in Income Statement accrual acc..ting	E.g. Tax expense  (Non cash flow)	(***)
Add decrease in Asset Account in SOFP and vice versa	E.g. Decrease in tax assets	***
Add increase in Liability Account in SOFP and vice versa	E.g. Increase in current tax payable	***
Cash received +ve, Cash paid –ve balance	Cash flow	**/(**)