Identify and explain the major steps involved in preparing t

Identify and explain the major steps involved in preparing the statement of cash flows.

Solution

StepThere are four major steps involved in preparing a cash flow statement:-

Step 1. Find out cash flow from operating activities: Convert net income as per income statement from accrual basis to cash basis. We have two method to compute cash flow from operating activities. a) Direct method. b) indirect method

Step 2. Find out cash flow from investing activities: In this step we find out the effect of changes in non current assets have on cash. Balance of non current assets can be taken fron balance sheet along with other similar items like sale of non current asset in cash/ purchase of non current assets in cash.

Step 3. Find out cash flow from financing activities: in this step we find out the effect of changes in non current liabilities and owners equity on cash balance. Non current liability and owners equity can be find out from balance sheet along with other related items (eg - dividend paid in cash ).

Step 4. Reconcile the change in cash: this is the last and the final step is to reconcile the total of increase/decrease in cash flows from operating activities , investing activities , financing activities as computed in step 1,2& 3 above with cash balance as provided in the balance sheet.