How to prepare cash flow statement in easy steps: A Master Guide

Many of us find it difficult to prepare cash flow statement (CFS). Some of us get confused in what to add and what to reduce, and the CFS never tallies for them. But do you know there is simple way to prepare cash flow statement. I am going to present a technique in this article for preparation of CFS and after learning the technique, I am sure you can prepare any CFS within half an hour, no matter how large is your balance sheet data.

As we know Accounting Standard (AS)-3 provides for preparation of CFS. AS-3 provides for two methods i.e. direct method and indirect method. To comply with the requirement of SEBI, reporting enterprises generally use only the indirect method. So I am focusing on indirect method.

First of all you need to have the format of Cash Flow statement. AS-3 ask for classification of the cash flow into three parts i.e.

• Operating Activities (Principal revenue producing activities)
• Investing Activities (acquisition and disposal of long term assets and other investment)
• Financing Activities (activities that result in the size and composition of owners’ capital and borrowing of the enterprise.

Format of preparing cash flow statement (indirect method)

Now you can see from the format we need find out the Net Increase/decrease in Cash & Cash Equivalents, that will be added to opening cash & Cash equivalent to find out the closing cash & Cash Equivalent.

Note: Cash includes cash on hand and demand deposit with bank. Cash Equivalent are short term maturities ( three months or less) held for meeting short term cash commitments. For example Fixed deposit which are to be matured within a period of three months from date of CFS, are included in cash equivalents. So cash includes cash equivalent.

So we need to find out net change in cash. We know that :-

Assets = Liabilities

Or

Non cash assets + Cash Assets = Liabilities

Or

Cash Assets= Liabilities –Non Cash Assets

So to find out net change in cash we have,

Cash assets of current year – Cash assets of previous year = current year(Liabilities –Non Cash Assets) –Previous Year(Liabilities –Non Cash Assets)

Hence,

Net change in cash = current year(Liabilities –Non Cash Assets) –Previous Year(Liabilities –Non Cash Assets)

The net changes in cash arrived by taking into consideration all other items of balance sheet of both year. So to prepare cash flow you need to first make a change in Balance sheet Schedule. Format is given below:

Changes in Balance Sheet Format

Now you can see in note No. 14, the amount is net changes in cash. You need to consider all other changes in balance sheet to arrive net change in cash. In CFS the same is classified into different activities for presentation purpose.

So now start with CFS. First fill the profit before tax (PBT) from profit and loss account. Add Non cash items to it like depreciation, Exchange loss, bad debts, provisions etc. The idea is to get real cash from operations, these non cash expenses are added back to get this.

Then adjust items which you need to show in investing & financing activities like Finance cost (Bank charges, interest), Interest income etc. here the concept is to remove these items from Operating profit and show them under respective head.

Now here is One concept/trick.

We are taking PBT in CF, whereas in balance sheet Profit before tax (PAT) is added to reserves. As we discussed earlier we need to check each balance sheet item to get Net change in cash. So if I say we are taking PAT in cash flow statement, that will not be wrong since PBT= PAT + Provision for taxes. So PBT is like we are taking PAT and then adjusting tax provision we will get PBT.

Now you will get Operating profit before working capital changes. Next we need to find out changes in working capital. Always note that any increase in current asset will be reduced since cash is blocked. And any increase in current liabilities are added since cash is released. You need to take it item wise and check with “changes in Balance sheet”. You also need to check that whether any adjustment you have already taken for that item in finding out operating profit before working capital changes.

Inventory & Trade Receivables

Fill the changes in inventory in CFS from changes in balance sheet and mark it in changes in balance sheet that you have considered this difference. Likewise now come to trade receivables, here you have already added bad debts & provision of debts in PBT above. These bad debts & provisions now need to adjust in debtor also. Add these bad debts & provisions is added in current year trade receivables since originally it has reduced out debtors. Then reduce last year trade receivables to get change in trade receivables.

Like above you need to consider each current asset & current liability item and check whether you have already added/reduced it from PBT above in “Operating profit before working capital changes”

Exchange Loss/Gain

Exchange loss also you have added in PBT so find where these loss need to be adjusted. Originally you have might have reduced trade receivable and debited the exchange loss. So now you need to add it back to trade receivables to find out changes in trade receivables. If these exchange loss/gain are from Trade payable then adjust with them in trade payable.

Provision for Taxes

You will also find problem in calculation of changes in short term provision. Here it is trick. As I explained above you have already taken provision for tax adjustment since you are taking PBT. PBT is (PAT + Provision for tax).So now reduce provision for tax from current year short term provision and then reduce it from last year short term provision to get changes in short term provision.

Deferred Taxes

Since you are taking PBT in the start, so deferred tax is already adjusted in PAT to get PBT. Now there will be no extra treatment for DTA/DTL in working capital changes since you are taking PBT, which is after adjusting DTA/DTL.

Income Tax Paid

Since we need to show income tax paid separately, we need to adjust with it with short term provision. The current year provision is less due to income tax paid included in it. So Add it to current year provision.

So finally the formula for calculation of short term provision (STP) is:-

(Current year STP + Current Year Provision for Tax-Income tax paid) – Previous year Short term provision.

After doing above, You will get Cash generated from operations. Reduce income tax paid from it and you will get “Net cash flow from operating activities (A)”.

Check in your changes in balance sheet that all current asset & liabilities are covered. And believe me you are doing it right.

Now find out Cash flow from investing activities

Fixed Assets

Now in investing activities find change in fixed assets and since you have already added depreciation above in PAT, add back it in current year fixed asset balance and then reduce it from previous year balance. If you have also taken any profit/ loss in PBT above, the same also you need to adjust here.

Then show other item adjusted in PBT like interest income etc.

 Likewise find out Cash flow from financing activities.

Then calculate add all over findings and you will get Net increase in Cash and cash equivalents. Add it with Cash and cash equivalents at the beginning of the year to find out Cash and cash equivalents at the end of the year.

Note

• Now you must have given the second treatment to item added in PBT to get Operating profit before working capital changes.
• All changes in “change in Balance sheet must be covered” including reserves & surplus that balance you have taken as PBT i.e. PAT-Provision for Tax
• Your closing cash balance must have matched with your balance sheet

Please comment for any query on How to prepare Cash flow statement.

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CA Harish Negi

Hey readers, welcome to my blog investsaver.com. I am Chartered Accountant by Profession and I love to write on tax & money matters. You may ask your queries through comments related to the topic, I will be happy to answer them.

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