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The Step-By-Step Guide to Prepare Cash Flow Statement Quickly & Easily
We can surely say that after going through the below-mentioned steps, your thoughts will change from “I cannot prepare the cash flow statement” to “ I can do it, it’s a child’s play for me.” Wondering how we can be so sure? Well, you’ll agree with us after reading the following step-by-step process. Read it carefully.
Step # 1 Calculate opening cash & cash equivalents
The process of cash flow statement begins with calculating the opening cash and cash equivalents. Generally, this amount is given to you. But, if it's not, then it can be easily calculated from the balance sheet. Simply add the balance of cash and cash equivalents such as market funds, commercial deposits, etc.
Step# 2 Calculate cash generated from operations
Now that you have calculated the cash and cash equivalents, the next step is to compute the income generated from the operative activities. To calculate this, you need to add non-cash expenses, such as depreciation to the net income, and increment in accounts payable, and then subtract the increase in accounts receivable. For example, if the net income is $500, depreciation is $20, accounts payable increased by $10, and accounts receivable increased by $5, then cash from operations will be ($500+ $20)- $5 + $10 = $505.
Step # 2 Compute cash generated from investments
After calculating the cash generated from the operating activities, the next step is to compute the income from investments. To calculate it, add the cash received from the sale of assets and deduct the amount paid to purchase any capital asset. For example, if the sale is $10 and the purchase is $5, then the net cash from investments will be ($505 + $10)-$5 = $510.
Step # 3 Calculate the cash generated from finances
After you have calculated the cash from investments, the third step is to calculate the inflow/outflow from the financing activities. To compute it, add the increase in capital and deduct the amount paid by way of dividends, interest on debentures, etc. For example, if the capital has increased by $20, $5 is paid as a dividend, and $2 as interest, then the cash flow from the finances will be ($510+$20)- $7 = $523.
Step # 4 Find the closing balance
Now that you have calculated the cash generated from all the three activities, the last step is to find the closing balance. This can be done by simply adding the net inflow/outflow to the opening balance. For example, if the opening balance was $600, then the closing balance will be ($600 + ($505 + $510 + $523) ) = $2138.
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