Question

Select TWO of the following topics to discuss: 1. Discuss the purposes of Statement of the Cash Flow, and what makes SCF different from other financial reports (e.g., Balance Sheet & Income Statement). 2. Discuss differences between Direct and Indirect methods to prepare a statement of Cash Flow. 3. Discuss the Indirect method in more detail.

minimum of 300 words

Please do not use other people's word

Answer 1

CASH FLOW STATEMENT

A cash fllow statement is simply refers to the statement of cash flows. It is a statement prepared by the organizations to know the sources of inflow and out flow of cash. It is usually prepared on cash basis. Cash flow statement helps to show the causes of changes in cash. Cash flow statement is a financial statement that summarises the inflow and out flow of cash and cash equivalents of a company. It is prepared on cash concept of accounting.

QUESTION : [1]   PURPOSES OF SFC AND IT'S DIFFERENCE FROM OTHER FINANCIAL STATEMENTS

- What is the purpose of cash flow statement ?

• The main purpose for the preparation of cash flow statement is to know the sources of company's cash inflow and cash outflow , over a specified period of time. These inflows and outflows are further classified in to; operating activities , investing activities & financing activities.   
• Yet another main objective is to find the liquidity and lonterm solvency of company.
• Such statements helps in the area of capital budgeting decisions.   
• Statement also reveals the sources and uses of cash and cash equivalents of an organization.   
• Statement of cash flow is used to assess, monitor and control the liquid resources available in the organization.   

- How does SCF different from other financial statements /reports ?

CASH FLOW STATEMENT	INCOME STATEMENT	BALANCE SHEET
1] It is prepared to show the inflow and outflow of cash and cash equivalents of company	1] It is prepared to know the revenues, gains, expenditures and losses of a particular period.	1] It is prepared to show the financial position of the company / organization.
2] It is mainly classified in to three activities; operating activities, investing activities and financing activities.	2] It is classified in to two activities	2] It is classified in to two activities; assets & liabilities.
3] Main purpose is to know the liquidity and long-term solvency of business.	3] Main objective is to know the profitability of business.	3] To know the financial position of a company.
4] It is prepared on the basis of balancesheet and profit and loss account.	4] It is prepared on the basis of various ledger accounts.	4] It is prepared while taking profit and loss in to consideration.
5] Cash basis method	5] Accrual basis method.	5] Both accrual and cash basis items are included
6] Disclose cash inflow and outflow	6] Disclose profit /loss of a business	6] Disclose assets , liabilities and owner's equity of an organization.

QUESTION : 3 DISCUSS INDIRECT METHOD IN DETAIL

INDIRECT METHOD OF CASH FLOW STATEMENT

Cash flow statement is a financial statement used to know the inflow and out flow of cash and cash equivalents of a company. And the preparation of such statements can be made in two ways, they are;

1. DIRECT METHOD
2. INDIRECT METHOD.

Here we have to discuss about indirect method of cash flow statement preparation.

The preparing of such statements using indirect method adjusts net income for the changes in balancesheet to know the cash from operating activities of business. The changes in the preparation of operation activities is only the difference among direct & indirect method of cash flow statement. Indirect method is also known as net profit method or reconciliation method. This method is starts with net profit/loss as per the profit and loss account of company.

Such methods are usually used , when the amount of sale is not given. And also such method is used in the companies who listed in Indian stock exchanges, for the preparation of statement of cash flows.

There are some points to be rembered while preparing cash flow statement using indirect method; they are :

• Depreciation, goodwill, loss on sale of fixed assets, transfer to reserves, priliminary expenses, discount on issue of securities written off etc. should be added back to net profit.
• Profit on sale of fixed assets , profit on sale of investments, reserves writtenback [ depreciation, doubtful debts etc. ] , non-trading incomes etc. should be deducted from net profit.   
• Decrease in current assets should be added to operating profit.
• Increase in current assets should be deducted from operating profit.
• Decrease in current liabilities should be deducted from operating profit.
• Increase in current liabilities should be added to operating profit.

The format for computing net cash from investing activities and financing activities are same in both direct & indirect method of cash flow statement. Only the preparation of cash flow from operating activities will be different.