Cash flow statement is one of the five financial statements that particularly deals with the reporting on cash generation and usage over an accounting period. There are three business activities that can generate or use cash.
Three types of activities are presented on the face of the cash flow statement.
Operating activities are those activities that are basic operations of the business such as manufacturing and selling of goods. All income statement items are reported under the first section known as CASH FLOWS from OPERATING ACTIVITIES. Remember the cash flows statement shows the actual cash generated or used in operations of a business. That is why all non cash items like depreciation, amortization, interest income and expenses, taxation expenses, etc are adjusted in this section on the face of the statement under operating activities head. There are generally two methods of preparing cash flow statement. Direct method and Indirect method. Only under indorect method these adjistments are accounted for and this is the only difference between the direct and indorect methods of preparing cash flow statement.
Under investing activities section all investments that involve short or long term investments, are reported with respect to actual movement of cash. These transactions can be purchase and sale of short and long term investments, investments in associates and subsidiaries and also the sale purchase of non current assets.
Under the financing activities all cash raised or paid to investors and lenders is reported. The cash collected in shape of shares application money is a cash inflow and cash paid against repayment of long term liabilities like loans are cash outflows.
To see how to solve a cash flow statement question see this video.
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