Cash Flow Statement - Essay Example

The secondary objective is to disclose information about the operating financing and investing activities of a company during an accounting period. The statement of cash flow gives an indication about the relationship between profitability and cash-generating ability and thus the quality of profit earned.

In brief, cash flow serves the following purposes: Helpful in planning and coordinationHelpful in control useful in internal financial managementKnowledge of changes in cash position in direct METHOD: Under this method cash flow from operating activities is calculated on the basis of net profit as reported in the profit and loss account or balance sheet and is especially used when the amount of sales is not given in the question. Few adjustments made under this method are as follows: Adjustment for noncash and nonoperating items: For calculating operating profit before working capital changes, noncash and nonoperating items (such as depreciation, doubtful debts, dividend, and interest) are added back.

The non-operating incomes and gains are deducted from the net profit for the year. Adjustment for changes in current assets and liabilities: Decrease in current assets and increase in current liabilities is added back and increase in current assets and Decrease in current liabilities is deducted from the operating profit before working capital changes to arrive at the cash generated from operations. Thus under the indirect method adjustments are made to net profit whereas under the direct method individual items of revenue and expenses are adjusted to calculate cash receipts and cash payments.

Adcock Co. for 2007Net income2500000PLUS: Depreciation on plant assets700002570000PLUS: Loss on sale of plant assets12000net cash by operating activities2582000References:1. Eugene F. Brigham Louis C.

Gapenski, 1994, 7th edition, Financial Management Theory, and Practice. 2. Richard A.Brealey, Stewart C.Myers with the Brattle Group, 2004, Brealey and Myers on Corporate Finance, Financing and Risk Management.3. Stephen H archer G.marc Choate George Racette 2E Financial Management, 1983