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Cash Flow Statement ( Indirect Method ) AS 3 | Class 12th | CA Intermediate | Accounts - YouTube
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Hello guys, today we are going to study Cash
Flow statement which is a very important topic
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for Commerce Students.
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But before proceeding let me tell you that
I am Lavish Gupta and I am currently pursuing
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CA as well as BBA
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So, let's start.
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See in this video I am going to tell you guys
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What is cash flow statement?
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and
How to prepare it?
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Actually we will study Indirect method in
this video and soon I will publish the video
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for Direct method too.
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Okay, So, what is the meaning of Cash Flow
statement?
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Well it is pretty obvious from its name that
it is a statement of Cash Flow.
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Here, you guys must focus on the term Cash
Flow.
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See, in business cash can either flow into
the business or can flow out of the business
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. For Example When Debtors pay their dues
or when a business sells an old machinery
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cash comes into the business which is known
as Inflow of Cash and when a business pays
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money to its Creditors or buys a new machinery,
the cash goes out from the business which
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is known as Outflow of Cash.
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So, from all this we can say that Cash flow
Statement is a statement which shows the inflow
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and outflow of cash and cash equivalent of
a business during an Accounting period.
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From this definition, we get to know about
two things about Cash Flow statement which
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are
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First, Cash Flow statement shows the Inflow
and Outflow of Cash and Cash Equivalent.
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Don't worry, I am going to tell you what Cash
Equivalent means, just stay with me.
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And second Cash Flow statement is usually
prepared for an Accounting period.
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Okay, so what is Cash Equivalent in Cash and
Cash Equivalents.
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Here you guys must understand that Cash Equivalent
is not same as cash but these are those investments
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which can be easily converted into cash i.e
those investments which have a maturity period
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of less than 3 months and also such investment
should be subject to minimum changes in value
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i.e their value should not be change much
during a period of time.
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Now let's go to how to prepare Cash Flow Statement.
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Well in order to prepare Cash Flow statement
as per AS 3, you guys need to know about three
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activities which happens in a business.
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These activities are Operating Activities,
Investing Activities and Financing Activities.
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While preparing Cash Flow Statement, cash
flow from each of these activities is calculates
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separately and at last they are computed collectively
to know the net increase/decrease in Cash
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flow of a business.
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A brief knowledge of these activities will
help in preparing Cash Flow Statement.
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Starting with Operating Activities.
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These are the principal revenue generating
activities of the enterprise.
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These activities include Sale of Goods and
services, Payment to Suppliers, Payment to
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employees, factory expenses, Royalty, fees,
commission etc.
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Next is Investing Activities.
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These activities are relates to the Acquisition
and disposal of long term assets and other
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investments which are not included in cash
equivalent.
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Remember I said those investments which are
not included in cash equivalents i.e those
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Investments which are invested for a longer
period of time i.e more than three months.
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Example of Investing activities are Sale of
Fixed Assets, Purchase of Fixed Assets, Sale
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of investment, Purchase of Investment, Interest
or Dividend received etc.
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And the third and the last activity is Financing
Activity.
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These are the activities which results in
the change in the size and composition of
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the Owner's capital and borrowings of the
Enterprise.
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Examples include Issue of Shares, Issue of
Debentures, Redemption of Shares, Redemption
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of Debentures, Interest or Dividend paid etc.
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So, as I said Cash Flow is classified into
three parts that is Cash Flow From Operating
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Activities, Cash Flow from Investing Activities
and Cash Flow from Financing Activities.
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And in order to prepare Cash Flow Statement
we have to prepare Cash Flow from each of
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these activities one by one and then at last
we will combine them and will get Cash Flow
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Statement.
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Okay, so this is the format of Cash Flow Statement
which comprises of Particulars, Details and
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Amount.
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At the above of the Format we write Cash Flow
Statement for the year ended or for the period
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ended ___ ___ ___ means for whatever period
you are preparing it.
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For Example, here we are preparing it for
the year ended 31st March 2018.
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Now let's move inside the format of Cash Flow
Statement.
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So, it starts with a heading which is called
Cash Flow from Operating Activities.
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It means that firstly we calculate Cash Flow
from Operating activities.
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To calculate it we use Net Profit which we
get from the Trading and Profit and Loss Account.
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I am explaining it with some imaginable figures.
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So, let's suppose Net Profit is Rs. 200000
And then we add to it Non Cash and Non Operating
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Expenses such as Depreciation, Share Discount
written off, Loss on Sale of Assets, Provision
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for Taxation etc.
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After that we subtract from it Non Cash and
Non Operating Incomes such as Profit on Sale
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of assets, Dividend received etc.
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After doing these 3 steps we get Cash Flow
before changes in Working Capital.
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Now Changes in Working Capital means changes
in Current Assets and Current Liabilities
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from previous period to current period.
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Here in our case from opening period of the
year to closing period of the year.
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Now here you have to remember that Increase
in Current Liabilities and Decrease in Current
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assets is added whereas Increase in Current
Assets and Decrease in Current Liabilities
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is subtracted.
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An easy way to memorize this is to remember
only that Increase in Current Liabilities
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is Added.
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Now if increase in Current Liabilities is
added, it ultimately means that Decrease in
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Current Liabilities will get subtracted.
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And also remember that in case of Assets it
is opposite of Liabilities i.e Increase is
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subtracted and decrease in Assets is added.
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Got it?
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After doing this we will get Cash Generated
from/used in Operations.
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If this amount is in positive we will write
Cash Flow generated from Operations and if
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this is in negative, we will write Cash Flow
used in operations.
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Here in our case, the said amount 2 lakhs
is in positive, so we will write Cash generated
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from Operations.
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And then the last step of Cash Flow from Operating
Activities is to subtract the Actual Taxation
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paid.
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And we will get Cash Flow from or used in
Operating Activities.
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Similarly if it is in positive we will use
Cash Flow from and if the total is in Negative,
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we will use Cash Flow used in Operating Activities.
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Here, in our case the amount is in positive
so we will write Cash Flow From Operating
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Activities.
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We will write only this total in the Amount
column.
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You guys may be thinking why?
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Don;t worry you are going to know really soon.
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So next is Cash Flow From Investing activities.
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As this is a small slide, so I am continuing
the format on the next slide.
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Okay so now we have prepared Cash Flow from
Operating Activities, now we will move on
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to Cash Flow from Investing Activities.
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Here transactions related to Acquisition and
disposal of Assets come.
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All those transaction which leads to the inflow
of cash are added and all those transactions
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which leads to the outflow of Cash are subtracted.
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Some examples of such transactions are Purchase
of Assets, Purchase of Investment, sale of
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assets, sale of Investment, Interest received,
Dividend received etc.
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Let's discuss each of these and whether they
will be added or subtracted and the reason
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behind it.
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So, Starting with Purchase of Assets, Purchase
means to buy something either on cash or credit.
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But in Cash Flow Statement, we only deals
with such transactions which take place into
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cash.
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So, here purchase of assets means buying something
with cash.
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And when we buy something we give cash to
the owner of such asset which leads to the
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outflow of cash and those transactions which
leads to the outflow of cash will get subtracted.
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That is their amount will be written in negative.
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If you guys are not familiar with the concept,
let me tell you that in Accounts we can also
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use bracket instead of negative sign to show
that the amount is in negative.
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Next is Purchase of Investment.
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Same as Purchase of Assets, it will also be
in negative as it also leads to the outflow
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of cash.
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Third is Sale of Assets.
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Now, when we sell something for cash, Inflow
of Cash takes place.
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And as i previously said all those transaction
which will lead to inflow of Cash will be
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added.
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So, it will have a positive sign.
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Similarly as Sale of Assets, sale of Investment
will also be positive.
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Now, when we have invested somewhere we usually
get Interest or Dividend on it . And Receiving
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Interest or Dividend means Cash is coming
into the business.
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Thus these transactions will also have positive
sign.
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Now, we will add and subtract these transactions
as per their sign and the total will be written
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in the Amount column.
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And same as Operating Activities, if the total
is in positive, we will write Cash Flow from
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Investing Activities and if it is in negative,
we will write cash flow used in Investing
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Activities.
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Now third and the last is Cash Flow from Financing
Activities.
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Same as Investing Activities , all those transactions
which will lead to the Inflow of Cash here
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will be in positive and those which leads
to the outflow of cash will be written in
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negative.
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Following are some of the examples, let's
study each one by one.
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First is Issue of Share Capital, when a company
issues shares, it receives money from the
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public, thus inflow of cash takes place.
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Thus it will be in positive.
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Next is Repayment of Bonds or Debentures,
when we repay money to the bonds or debentures
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holders, outflow of cash takes place, thus
it will be written in negative.
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Third is Redemption of Preference share capital.
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Redemption is same as repayment, thus it will
also be in negative.
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Next is proceeds from loan.
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It means taking loan from someone or from
banks or from any financial institution.
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It leads to the inflow of money thus positive.
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Repayment of loan is the opposite of Proceeds
from loan and thus negative.
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Next is Interest and Dividend paid.
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See, whenever a company raises share capital
or borrows loan from someone or financial
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institutions, company has to pay interest
or dividend on it which results in the outflow
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of cash, therefore it will also be in negative.
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Now we will add and subtract all these transactions
as per their sign and then the total will
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be written in the amount column.
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Now if this total is in positive we will write
Cash flow from Financing Activities and if
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it is in negative we will write Cash Flow
used in financing activities.
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Now, we have prepared cash flow of all three
activities i.e Operating Activities, Investing
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Activities and Financing Activities, now we
will add and subtract the total of each of
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these activities as per their sign and whatever
the total comes will be written as net increase
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or decrease in cash and cash equivalents.
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If in positive,we will write net increase
in cash and cash equivalent and if it is in
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negative, we will write net decrease in cash
and cash equivalents.
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This is where our cash flow statement ends
but if you are preparing it for the exams,
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there is actually another step.
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Actually, in the question you will be given
opening and closing balance of cash and bank
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balances.
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What we will do here is , we simply add the
opening balance of cash and cash equivalent
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i.e cash and bank balances to the net increase/
decrease in cash and cash equivalent and the
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result should be equal to the closing balance
of cash and cash equivalent which is also
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given in question.
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It also ensures correctness of the cash flow
statement.
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That's it.
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Hope you like this video, and do not forget
to like, comment and subscribe.
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Thank you.
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