Preparing a Cash Flow Statement
In essence, preparing a cash flow statement is very straightforward. You should therefore simple learn the format given above and apply the steps noted in the example below. Note that the following items are treated in a way that might seem confusing, but the treatment is logical if you think in term of cash.
- Increase in stock is treated as negative (in brackets). This is because it represents a cash outflow; cash is being spent on stock.
- An increase in debtors would be treated as negative for the same reasons; more debtors mean less cash.
- Be contrast an increase in creditors is positive because cash is being retained and not used to pay off creditors. There is therefore more of it.
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