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Statement of cash flows

can be quiet challenging. This tutorial outlines two methods of preparing a statement of cash flows. The direct method, (which is the preferred method) and the indirect method (which is the more commonly used method). This tutorial covers three comprehensive examples in a step by step manner on how to prepare cash flow statements and the importance that they bring to an organisation.

Most accounting textbooks require students to reconstruct a dozen ledger accounts just to arrive at cash receipts from customer or cash paid to suppliers. We however, have demonstrated a way to think about cash inflows and outflows without having to reconstruct any ledger accounts.

Take an asset account like accounts receivable. When accounts receivables have increased during the period no cash has been collected. So effectively cash has decreased. Now take the inventory account. When the inventory account has increased during the period, inventory has been purchased so therefore cash has decreased. We can conclude that an increase in an asset account decreases the cash account and a decrease in an asset account increases the cash account.

Now take a liability account. When accounts payable increase cash has been saved and effectively it can be said that cash has increased. The same goes for equity accounts. An increase in a liability or equity account results in an increase in cash and a decrease in a liability or equity account results in a decrease in cash.

Like always, our team strives to bring our users the best accounting tutorials on the web today. This is why we’ve created a statement of cash flows template. Save time drawing up your own. We’ve included both a direct and indirect statement of cash flows template, along with individual templates to help calculate items like cash receipts from customers and cash paid to suppliers

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