Precautions while preparing Cash Flow Statement

While preparing Cash Flow Statement, the following special points must be considered carefully:

  1. First of all, check the accounting years on the top of the Balance Sheet, Check whether the previous year and current year information is given or current year and previous year information is given, as reading it the opposite way will lead to totally wrong solution.
  2. In notes to Accounts, consider the sub items only as given in the notes to accounts, ignoring the main head of the item given in the Balance Sheet, to avoid problem of double counting.
  3. Regarding Implied adjustments: If rate of interest is mentioned with Debentures, it must be considered as expense and treated accordingly.
  4. It is not necessary that the result of all the types of activities is inflow or outflow of cash, sometimes it can be nil, must show all the parts of Cash Flow Statement, anyhow.
  5. While attempting question in exam, check whether only operating/ Investing/ Financing activities has been asked or Cash Flow Statement as a whole, has been asked.
  6. Issue of bonus shares do not result in cash flow.
  7. Debentures are assumed to be redeemed at the end of the accounting year (if date of redemption is not given) so interest is calculated at the opening balance.
  8. Debentures are assumed to be issued at the end of the accounting year (if date of issue is not given) so interest is calculated at the opening balance.
  9. Non-cash transactions must not be considered for calculating cash inflow/outflow.
  10. Discount on issue of shares/debentures must be considered at the time of calculating cash from financing activities, by showing the net amount received only.
  11. When there is increase in the value of goodwill, the result is to be shown as cash used in investing activities for purchasing goodwill.
  12. When there is decrease in general reserve, the effect should be seen on shares (issued as bonus shares), or declaration and payment of Dividend, and should be considered accordingly.
  13. Items of Balance Sheet with Notes to Account should be treated from Notes to Account only, not from Balance Sheet, so that there in no Double Counting. At the same time there won't be any chance of skipping any item from consideration.

Learning Games and Activities in Accountancy – Class 12

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