What is Statement of Cash Flow?

Cash flow is the amount of cash inflow and outflow form the cash account of an organization. It eliminated the non-cash transactions and only accounted for the cash transactions.

The cash flow is recorded in a specific report model which is term as statement of cash flow. The statement is consist of three components naming

  • Operating Activities
  • Investing Activities
  • Financing Activities

The changes in working capital is computing under the operating activities. Working capital includes accounts receivable, Account payable and Inventory.

While the investing activities comprise of cash flow generated from sale of fixed assets. And cash out flow for buying any fixed assets.

While the financing activities comprise of cash inflow and outflow generated from share capital and liabilities section of the balance sheet.

Methods For Preparing Statement of Cash Flow:

There are two methods using to prepare statement of cash flow for any organization.

  • Direct Method
  • Indirect Method

The direct method is recommended by Financial Accounting Standards Board (FASB). The difference between the two methods lies only in the operating activities section while the other two sections are same in the two sections.

Treatment Of Account Payable In The Statement of Cash Flow:

The account used for the recording the amount of money owns by company’s suppliers to the company. In normal routine the account is considered as current liability of the company as it is due within one year.

Some time when it is specific that the amount due will be paid more than one year time span then it can recorded under the head of long term liabilities.

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In the cash flow statement account payable is treated under the first component. We start the cash flow from the positive or negative net income. And then if there is increase in the account payable during the time for which cash flow statement is preparing.

The increase in account payable is always add up with the net income we taken from company’s profit & loss, the logic behind this treatment is the credit sales occurs during the financial year.

So that we exclude the amount comes from net income comes due to net of receivables and net sales.

Lets have a look on the followings examples which will definitely help you to understand.

Example:

Analyze the following information of Desk Corporation and Make cash flow statement.

Required: Full computation for the amount of Account payable is required.

Profit & Loss Statement
For Desk Corporation

Balance Sheet
For Desk Corporation

Computation For Account Payable Amount:

If we look at the balance sheet of year 2017 the account payable is worth $35,000 while If we see on the balance of Account Payable at the year-end 2018 it increases to $70,000. It means that there is increase in the amount of account payable.

Account Payable = $35,000-$70,000

Increase in Account Payable = $35,000. So it means that there is net amount credit sales for which we have not received any cash amount. So we will subtract it in under the Operating Activities section. If the amount is of payable decreases, then it means that the organization received cash more related to sales.