Preparing Cash Flow Statement

Cash flow statement is a financial statement that reveals how much cash comes into a business and how much goes out. This document or stamen is considered as a necessary companion to an income statement and a balance sheet when evaluating the financial condition of a business. Preparing cash flow statement is very essential when doing any business as it will help you avoid your business running out of money. The main purpose for cash flow statement preparation is to report the sources and uses of cash during the reporting period. Statement of cash flow can be prepared in several different formats. Let’s find out the methods for preparing cash flow statement.

Given below are the preparation methods for cash flow statement:

Direct method – Direct method of preparing cash flow statement is a very simple and result is more easily understood report. In this direct method, you are analyzing or evaluating your cash and bank accounts to identify cash flow during the period. You could use a detailed general ledger report that shows all the entries to the cash and bank accounts. Then you would determine the offsetting entry for each cash entry so as to determine where each cash movement should be reported on the cash flow statement.

The other way of determining cash flows through direct method is to prepare a worksheet for each major line item, and eliminate the effects of accrual basis accounting so as to arrive at the net cash effect for that particular line item for the period. In cash flow statement preparation under direct method, the report only contains the information of the period covered and does not have information to the income statement and balance sheet.  The information reported in this method is somewhat straightforward.  When you use the direct format of cash flow statement, there should also be a reconciliation schedule attached, which in essence is the indirect method.

Indirect method – Indirect method of preparing cash flow statement is frequently used and most common method. This method of reporting cash flow statement is less expensive to use. To prepare cash flow statement via this method you start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement. It shows the change in net working capital. Under this method you are basically evaluating your income and expense accounts, and working capital.