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Hi Reader,

I hope you are good and doing great.

You may be wondering why I have not sent you the Accounting Guide last week? Well, I have been very busy with my kid because of his examination. That is why I could not write the newsletter for you.

But today, you got good news.

Ta da, you are going to learn a new topic.

You have learnt about the working capital; what it is, how to calculate, analyze and manage it.

In working capital analysis, the most important character is CASH. Because cash is king and the life blood of any business. So, all accountants should be able to identify, calculate, analyze, and interpret the inflow and outflow of cash.

That is why this week’s “Accounting Guide” is about the cash flow

Concept description

What is cash flow

Cash flow is the turnover of a company’s operation into cash. It is the movement of cash in a business, how the cash is going out and coming in in the company. While cash flow statement is a document that summarizes the inflow and outflow of cash and cash equivalents at a certain point of time.

Why do companies need to prepare cash-flow statement?

Because every company needs cash for completing its business activities such as purchasing raw material or assets, paying expenses and taxes, and paying bank loans etc. Therefore, the company must measure or calculate how much cash it has at hand to meet its requirements.

According to International Accounting Standard (IAS-1) all the companies must record its transactions and prepare its financial statements on accrual accounting system. The Income statement prepared on this system does not show the profit in terms of actual cash. The cash flow statement represents the cash at hand. It also helps in the calculation and planning of working capital.

Cash flow statement helps in short-term and long-term cash planning such as it assists in finding the optimum level of cash. It tells how much cash is available for the investment and how much amount need to be borrowed for any upcoming project.

How to prepare cash flow statement?

A statement is divided into three main parts which shows the flow of cash in a business for different purposes.

​1. Cash flow from operating activities ​

2. Cash flow from investing activities

3. Cash flow from financing activities

​Cash flow from operating activities​

Cash flow from operating activities includes the inflow and outflow of from the business operations of a company such as; purchase of merchandise, raw material, supplies or payment of salaries and cash receipts from customers.

These activities are recorded in the statement with two different methods direct or indirect method.

Prepare cash flow statement in 3 steps

Cash flow from investing activities

Cash flow from investing activities includes the inflow and outflow of cash from the purchase and sale of long-term assets that are fixed and non-current in nature. Such as purchase of a new office building, sale of an old equipment or purchase of furniture and so on.

Cash flow from financing activities

Cash flow from financing activities includes the inflow and outflow of cash from the sale of equity stocks or debentures or the borrowing of long-term debt. Such as taking loan from bank, repurchasing common stocks, and paying dividend etc.

You have learnt about the cash flow and its statement. Test your knowledge and let’s have some exercise to practice.

Let’s go to Practice exercise

Solutions tips

Here are some tips to remember while solving these questions!!

Remember

• An increase in asset and expense may decrease cash.
• A decrease in liability may result in increase in cash.
• All activities related to business operations are operating activities.
• All activities for raising funds for a business project are financing activities.
• All activities for related to the purchase of long-term assets are investing activities.

Waoowww BONUS

Keys of practice exercise

Q1-

1. Decrease in cash

2. Decrease in cash

3. Decrease in cash

4. Increase in cash

5. Increase in cash

Q2-

A. Financing activity

B. Operating activity

C. Investing activity

D. Operating activity

E. Not involve cash flow

F. Operating activity

G. Financing activity

H. Financing activity

Wooho done for this week’s accounting practice??

Not yet!!!

Don’t worry you have the entire week to work and practice these exercises. You can cross check your answers with the keys of practice exercise.

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Till then

Hira from Accounting Drive

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