Preliminary expenses are the costs incurred during the initial stages of a business setup or during the preparation for a new project, such as incorporation expenses, legal fees, registration charges, etc. These expenses do not directly contribute to the generation of revenue and are considered as capital expenditures. While preparing the cash flow statement, the treatment of preliminary expenses is as follows:


Preliminary expenses are classified as cash outflows under the category of investing activities in the cash flow statement. This is because they are considered as capital expenditures and are not related to the day-to-day operational activities of the business.


Since preliminary expenses are considered as non-cash expenses, they do not affect the cash flow directly. These expenses are already incurred and paid for during the setup or preparation stage of the business, but they do not involve any cash outflow at the time of preparing the cash flow statement.


Preliminary expenses are not subject to depreciation as they are one-time expenses incurred at the beginning of the business. Therefore, there is no adjustment required for depreciation in relation to preliminary expenses in the cash flow statement.


Since preliminary expenses do not involve any cash inflow or outflow at the time of preparing the cash flow statement, they have no direct impact on the cash flow from operating, investing, or financing activities. However, it is important to disclose these expenses in the notes to the financial statements for transparency and completeness.


Even though preliminary expenses do not affect the cash flow, they are considered in the calculation of profit. These expenses are usually amortized over a certain period of time, typically over several years. The amortization of preliminary expenses is considered as a non-cash expense and is deducted from the profit to arrive at the cash flow from operating activities.

In conclusion, while preparing the cash flow statement, preliminary expenses are classified as cash outflows under investing activities. They are considered as non-cash expenses and do not directly impact the cash flow. However, they are included in the calculation of profit and are disclosed in the financial statements for transparency.