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Example: Preparing Cash flow Statement (Direct and Indirect Method) Video Lecture | Accountancy Class 12 - Commerce

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FAQs on Example: Preparing Cash flow Statement (Direct and Indirect Method) Video Lecture - Accountancy Class 12 - Commerce

1. What is a cash flow statement?
Ans. A cash flow statement is a financial statement that shows the inflow and outflow of cash during a specific period. It provides information about how cash is generated and used by a company, helping stakeholders understand the cash position and liquidity of the business.
2. What is the difference between the direct and indirect method of preparing a cash flow statement?
Ans. The direct method of preparing a cash flow statement reports cash receipts and cash payments directly, providing a detailed view of the cash flows from various operating activities. On the other hand, the indirect method starts with net income and adjusts it for non-cash items and changes in working capital to arrive at the net cash flow from operating activities.
3. How is the cash flow from operating activities calculated in the indirect method?
Ans. In the indirect method, the cash flow from operating activities is calculated by adjusting the net income for non-cash expenses such as depreciation, changes in working capital items like accounts receivable and accounts payable, and other non-operating income or expenses. The resulting figure represents the net cash provided or used by the company's core operations.
4. What are the benefits of preparing a cash flow statement?
Ans. The cash flow statement provides valuable insights into a company's ability to generate cash and its liquidity position. It helps in assessing the company's ability to meet its short-term obligations, evaluate its cash flow patterns, identify potential cash flow issues, and make informed decisions regarding investments, financing, and dividend distributions.
5. Can you explain the importance of the cash flow statement for investors and creditors?
Ans. For investors, the cash flow statement helps in assessing the quality of earnings by examining the cash generated from operating activities. It provides insights into the company's cash-generating capability, its ability to pay dividends, and the sustainability of its business model. Creditors, on the other hand, use the cash flow statement to evaluate the company's ability to generate cash to repay debts and interest, determining the creditworthiness and risk associated with lending to the company.
47 videos|117 docs|56 tests

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