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Describe the procedure to prepare Cash Flow Statement.

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The procedure to prepare Cash Flow Statement is described in the following steps in their chronological order. ‘ 

Step 1: Ascertain the cash flows from operating activities 

Step 2: Ascertain the cash flows from investing activities 

Step 3: Ascertain the cash flows from financing activities 

Step 4: Ascertain net increase or decrease by summing up the amounts of Steps 1, 2, and 3.

Step 5: Write the opening balance of cash and cash equivalents and deduct it from the amount ascertained in 

Step 6. The resulting figure arrived is the Closing Balance of Cash and Cash Equivalents. Describe ‘Direct’ and ‘Indirect’ methods of ascertaining Cash Flow from Operating Activities. 

As per the Accounting Standard 3 issued by the Institute of Chartered Accountant of India, an enterprise should report cash flows from operating activities Using either of the following methods:

Direct Method: It represents the cash receipts from debtors (customers) and customers and cash payments to creditors (sellers) and employees. It assists in estimating future cash flows. The excess of cash payments over cash.receipts is known as Net Cash Flow of Operating Activities.

Indirect Method: This method starts with the Net Profit before tax and extraordinary items. For this purpose, the Net Profit as revealed by the Profit and Loss Account cannot be taken into consideration as there exists some items which do not leads to outflow of cash. The following are those items that need to be added back to the Net Profit of the Profit and Loss Account.

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