Preparation of Cash flow Statement - Class 12, Accountancy Video Lecture - Accountancy Class 12 - Commerce

Hello guys, today we are going to study Cash
Flow statement which is a very important topic
for Commerce Students.
But before proceeding let me tell you that
I am Lavish Gupta and I am currently pursuing
CA as well as BBA
So, let's start.
See in this video I am going to tell you guys
What is cash flow statement?
and
How to prepare it?
Actually we will study Indirect method in
this video and soon I will publish the video
for Direct method too.
Okay, So, what is the meaning of Cash Flow
statement?
Well it is pretty obvious from its name that
it is a statement of Cash Flow.
Here, you guys must focus on the term Cash
Flow.
See, in business cash can either flow into
the business or can flow out of the business
. For Example When Debtors pay their dues
or when a business sells an old machinery
cash comes into the business which is known
as Inflow of Cash and when a business pays
money to its Creditors or buys a new machinery,
the cash goes out from the business which
is known as Outflow of Cash.
So, from all this we can say that Cash flow
Statement is a statement which shows the inflow
and outflow of cash and cash equivalent of
a business during an Accounting period.
From this definition, we get to know about
two things about Cash Flow statement which
are
First, Cash Flow statement shows the Inflow
and Outflow of Cash and Cash Equivalent.
Don't worry, I am going to tell you what Cash
Equivalent means, just stay with me.
And second Cash Flow statement is usually
prepared for an Accounting period.
Okay, so what is Cash Equivalent in Cash and
Cash Equivalents.
Here you guys must understand that Cash Equivalent
is not same as cash but these are those investments
which can be easily converted into cash i.e
those investments which have a maturity period
of less than 3 months and also such investment
should be subject to minimum changes in value
i.e their value should not be change much
during a period of time.
Now let's go to how to prepare Cash Flow Statement.
Well in order to prepare Cash Flow statement
as per AS 3, you guys need to know about three
activities which happens in a business.
These activities are Operating Activities,
Investing Activities and Financing Activities.
While preparing Cash Flow Statement, cash
flow from each of these activities is calculates
separately and at last they are computed collectively
to know the net increase/decrease in Cash
flow of a business.
A brief knowledge of these activities will
help in preparing Cash Flow Statement.
Starting with Operating Activities.
These are the principal revenue generating
activities of the enterprise.
These activities include Sale of Goods and
services, Payment to Suppliers, Payment to
employees, factory expenses, Royalty, fees,
commission etc.
Next is Investing Activities.
These activities are relates to the Acquisition
and disposal of long term assets and other
investments which are not included in cash
equivalent.
Remember I said those investments which are
not included in cash equivalents i.e those
Investments which are invested for a longer
period of time i.e more than three months.
Example of Investing activities are Sale of
Fixed Assets, Purchase of Fixed Assets, Sale
of investment, Purchase of Investment, Interest
or Dividend received etc.
And the third and the last activity is Financing
Activity.
These are the activities which results in
the change in the size and composition of
the Owner's capital and borrowings of the
Enterprise.
Examples include Issue of Shares, Issue of
Debentures, Redemption of Shares, Redemption
of Debentures, Interest or Dividend paid etc.
So, as I said Cash Flow is classified into
three parts that is Cash Flow From Operating
Activities, Cash Flow from Investing Activities
and Cash Flow from Financing Activities.
And in order to prepare Cash Flow Statement
we have to prepare Cash Flow from each of
these activities one by one and then at last
we will combine them and will get Cash Flow
Statement.
Okay, so this is the format of Cash Flow Statement
which comprises of Particulars, Details and
Amount.
At the above of the Format we write Cash Flow
Statement for the year ended or for the period
ended ___ ___ ___ means for whatever period
you are preparing it.
For Example, here we are preparing it for
the year ended 31st March 2018.
Now let's move inside the format of Cash Flow
Statement.
So, it starts with a heading which is called
Cash Flow from Operating Activities.
It means that firstly we calculate Cash Flow
from Operating activities.
To calculate it we use Net Profit which we
get from the Trading and Profit and Loss Account.
I am explaining it with some imaginable figures.
So, let's suppose Net Profit is Rs. 200000
And then we add to it Non Cash and Non Operating
Expenses such as Depreciation, Share Discount
written off, Loss on Sale of Assets, Provision
for Taxation etc.
After that we subtract from it Non Cash and
Non Operating Incomes such as Profit on Sale
of assets, Dividend received etc.
After doing these 3 steps we get Cash Flow
before changes in Working Capital.
Now Changes in Working Capital means changes
in Current Assets and Current Liabilities
from previous period to current period.
Here in our case from opening period of the
year to closing period of the year.
Now here you have to remember that Increase
in Current Liabilities and Decrease in Current
assets is added whereas Increase in Current
Assets and Decrease in Current Liabilities
is subtracted.
An easy way to memorize this is to remember
only that Increase in Current Liabilities
is Added.
Now if increase in Current Liabilities is
added, it ultimately means that Decrease in
Current Liabilities will get subtracted.
And also remember that in case of Assets it
is opposite of Liabilities i.e Increase is
subtracted and decrease in Assets is added.
Got it?
After doing this we will get Cash Generated
from/used in Operations.
If this amount is in positive we will write
Cash Flow generated from Operations and if
this is in negative, we will write Cash Flow
used in operations.
Here in our case, the said amount 2 lakhs
is in positive, so we will write Cash generated
from Operations.
And then the last step of Cash Flow from Operating
Activities is to subtract the Actual Taxation
paid.
And we will get Cash Flow from or used in
Operating Activities.
Similarly if it is in positive we will use
Cash Flow from and if the total is in Negative,
we will use Cash Flow used in Operating Activities.
Here, in our case the amount is in positive
so we will write Cash Flow From Operating
Activities.
We will write only this total in the Amount
column.
You guys may be thinking why?
Don;t worry you are going to know really soon.
So next is Cash Flow From Investing activities.
As this is a small slide, so I am continuing
the format on the next slide.
Okay so now we have prepared Cash Flow from
Operating Activities, now we will move on
to Cash Flow from Investing Activities.
Here transactions related to Acquisition and
disposal of Assets come.
All those transaction which leads to the inflow
of cash are added and all those transactions
which leads to the outflow of Cash are subtracted.
Some examples of such transactions are Purchase
of Assets, Purchase of Investment, sale of
assets, sale of Investment, Interest received,
Dividend received etc.
Let's discuss each of these and whether they
will be added or subtracted and the reason
behind it.
So, Starting with Purchase of Assets, Purchase
means to buy something either on cash or credit.
But in Cash Flow Statement, we only deals
with such transactions which take place into
cash.
So, here purchase of assets means buying something
with cash.
And when we buy something we give cash to
the owner of such asset which leads to the
outflow of cash and those transactions which
leads to the outflow of cash will get subtracted.
That is their amount will be written in negative.
If you guys are not familiar with the concept,
let me tell you that in Accounts we can also
use bracket instead of negative sign to show
that the amount is in negative.
Next is Purchase of Investment.
Same as Purchase of Assets, it will also be
in negative as it also leads to the outflow
of cash.
Third is Sale of Assets.
Now, when we sell something for cash, Inflow
of Cash takes place.
And as i previously said all those transaction
which will lead to inflow of Cash will be
added.
So, it will have a positive sign.
Similarly as Sale of Assets, sale of Investment
will also be positive.
Now, when we have invested somewhere we usually
get Interest or Dividend on it . And Receiving
Interest or Dividend means Cash is coming
into the business.
Thus these transactions will also have positive
sign.
Now, we will add and subtract these transactions
as per their sign and the total will be written
in the Amount column.
And same as Operating Activities, if the total
is in positive, we will write Cash Flow from
Investing Activities and if it is in negative,
we will write cash flow used in Investing
Activities.
Now third and the last is Cash Flow from Financing
Activities.
Same as Investing Activities , all those transactions
which will lead to the Inflow of Cash here
will be in positive and those which leads
to the outflow of cash will be written in
negative.
Following are some of the examples, let's
study each one by one.
First is Issue of Share Capital, when a company
issues shares, it receives money from the
public, thus inflow of cash takes place.
Thus it will be in positive.
Next is Repayment of Bonds or Debentures,
when we repay money to the bonds or debentures
holders, outflow of cash takes place, thus
it will be written in negative.
Third is Redemption of Preference share capital.
Redemption is same as repayment, thus it will
also be in negative.
Next is proceeds from loan.
It means taking loan from someone or from
banks or from any financial institution.
It leads to the inflow of money thus positive.
Repayment of loan is the opposite of Proceeds
from loan and thus negative.
Next is Interest and Dividend paid.
See, whenever a company raises share capital
or borrows loan from someone or financial
institutions, company has to pay interest
or dividend on it which results in the outflow
of cash, therefore it will also be in negative.
Now we will add and subtract all these transactions
as per their sign and then the total will
be written in the amount column.
Now if this total is in positive we will write
Cash flow from Financing Activities and if
it is in negative we will write Cash Flow
used in financing activities.
Now, we have prepared cash flow of all three
activities i.e Operating Activities, Investing
Activities and Financing Activities, now we
will add and subtract the total of each of
these activities as per their sign and whatever
the total comes will be written as net increase
or decrease in cash and cash equivalents.
If in positive,we will write net increase
in cash and cash equivalent and if it is in
negative, we will write net decrease in cash
and cash equivalents.
This is where our cash flow statement ends
but if you are preparing it for the exams,
there is actually another step.
Actually, in the question you will be given
opening and closing balance of cash and bank
balances.
What we will do here is , we simply add the
opening balance of cash and cash equivalent
i.e cash and bank balances to the net increase/
decrease in cash and cash equivalent and the
result should be equal to the closing balance
of cash and cash equivalent which is also
given in question.
It also ensures correctness of the cash flow
statement.
That's it.
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Thank you.