A2-L04 — Cash Flow Statements: Preparation
Understanding how complete cash flow statements are prepared using operating, investing, and financing activities.
Learning Objectives
By the end of this lesson students should be able to:
• prepare cash flow statements using the indirect method
• calculate cash generated from operations
• classify investing and financing cash flows correctly
• calculate net increase or decrease in cash
• answer examination-style questions
Concept Framework
Preparing a Cash Flow Statement
Cash flow statements are prepared to show how cash moved through the business during an accounting period.
Main Sections of a Cash Flow Statement
• cash flows from operating activities
• cash flows from investing activities
• cash flows from financing activities
• net increase or decrease in cash and cash equivalents
CORE RULES
| Activity | Examples |
|---|---|
| Operating Activities | profit adjustments, working capital changes |
| Investing Activities | purchase or sale of non-current assets |
| Financing Activities | issue of shares, repayment of loans |
| Non-Cash Items Added Back | Reason |
|---|---|
| Depreciation | no cash outflow |
| Loss on Disposal | non-operating item |
| Non-Cash Items Deducted | Reason |
|---|---|
| Profit on Disposal | investing activity item |
TRANSACTION LOGIC
Cash flow statements prepared using the indirect method begin with profit from operations.
Non-cash expenses and working capital changes are adjusted to determine actual operating cash generated.
The final statement explains changes in cash balances during the year.
Worked Examples
Example 1 — Depreciation Adjustment
Profit from Operations = £25,000
Depreciation = £4,000
Cash generated before working capital changes:
£25,000 + £4,000
= £29,000
Example 2 — Increase in Receivables
Receivables increased by £3,000.
Effect:
Subtract £3,000 from operating cash flow because customers have not yet paid cash.
Example 3 — Net Cash Movement
Operating Activities:
£18,000 inflow
Investing Activities:
£7,000 outflow
Financing Activities:
£5,000 inflow
Net Increase in Cash:
£18,000 − £7,000 + £5,000
= £16,000
📌 Additional questions are available in the 🎯 Question Papers + YouTube Explanation section.
Students should practise explanation questions regularly to improve examination performance.
Enrolled students may submit questions from recognised textbooks, past examination papers, or other academic material for expert clarification through the Student Doubt Support facility.
Structured Practice
Level 1 – Concept Check
Define operating activities
State one non-cash expense added back in operating activities
Level 2 – Application Practice
Explain why depreciation is added back when preparing operating cash flows.
Level 3 – Examination Style Question
Profit from Operations = £40,000
Depreciation = £6,000
Receivables increased by £4,000Calculate cash generated from operations.
(4 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
1. Can you prepare operating cash flow calculations accurately?
2. Can you classify cash flows correctly?
3. Can you explain working capital adjustments logically?
If unsure, revise the worked examples.
Detailed Activity Solutions
Solution to Level 3 question
Level 3 Answer:
Profit from Operations:
£40,000
Add Depreciation:
+ £6,000
Less Increase in Receivables:
− £4,000
Cash Generated from Operations:
£42,000
How This Topic Appears in the Examination
This topic commonly appears as:
• preparation of cash flow statements
• operating activity calculations
• interpretation of cash movements
Examiners assess:
• correct classification of activities
• accurate calculations
• understanding of working capital adjustments
Self-Assessment Checklist
I understand preparation of cash flow statements
I can calculate operating cash flows
I can apply working capital adjustments
I can classify investing and financing activities correctly
I can answer examination questions confidently
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