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Financial Statement Analysis

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Financial Statement Analysis-FIN621
VU
Lesson-13
STATEMENTS OF CASH FLOWS
(Continued)
Preparing Cash Flows
Ledgers are maintained on accrual basis; not on cash basis. Preparing Cash Flow
involves converting accrual-based accounts into cash-based. In small business, cash flow statement is
prepared directly from special journals for cash receipts and cash payments. For most businesses, such
statement is prepared by analyzing Income Statement and balance sheet.
Analyzing Income Statement involves re-arrangement of its items/Accounts in two
major groups viz (i) Sales, other income and gains, and (ii) Cost of sales, other expenses and losses.
These cover Operating and Investing Activities.
Analyzing balance sheet involves looking at changes in all of balance sheet accounts
(except cash) from beginning to end of accounting period, and transferring these changes to appropriate
area of cash flow statement.
Asset Account
Dr.
Asset Accounts
Cr
Liabilities Account
Cr
Liability Accounts
Dr
Owner's Equity Account Cr
Owner's Equity A/C
Dr
The arrow shows increases, and shows decreases. It has to be determined whether
a certain increase or decrease (which is debited or credited in ledger accounts involves cash inflow or
cash outflow. For example decrease in Asset Account other than cash shows either collection of
Accounts Receivable or sale of fixed assets, which results in Cash Inflow. Similarly increases in Assets
say fixed assets would imply purchase of fixed assets and hence cash outflow.
Practical exercise: Consider the following Income Statement of a business.
MOOSA CORPORATION
INCOME STATEMENT
FOR THE YEAR ENDED JUNE 30, _____
Rs.____
Net sales
900,000
Cost of Goods sold
500,000
Gross Profit
400,000
Operating expenses
300,000
(Includes depreciation Rs.40, 000)
Operating Profit (EBIT)
100,000
Other expenses
Interest
35,000
Loss on sale of marketable securities
4,000
39,000
Profit before tax (EBT)
61,000
Income tax expenses
36,000
Profit after tax
25,000
52
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Financial Statement Analysis-FIN621
VU
Other Income
Dividend revenue
3,000
Interest revenue
6,000
Gain on sale of plant assets
31,000
40,000
_______
Net Income
65,000
53