Question

Arrange the following in proper sequence while preparing Cash Flow Statement:,
(A) Net cash flow from operating activities
(B) Cash flow from financing activities
(C) Cash flow from investing activities
(D) Calculate net profit before tax and extraordinary items in working note
Choose the correct answer from the options given below :

• A. (A), (B), (C), (D)
• B. (D), (A), (C), (B)
• C. (B), (A), (D), (C)
• D. (C), (B), (D), (A)

Answer 1

The Correct Option is B

To prepare a Cash Flow Statement, the correct sequence of steps is as follows: 

1. Calculate net profit before tax and extraordinary items: This is determined in a working note. Before preparing the main sections of the Cash Flow Statement, we need to ascertain the profitability of the company, excluding taxes and extraordinary items. This gives us the initial figure required for further adjustments related to cash flows from operating activities.
2. Net cash flow from operating activities: Adjust the calculated net profit by accounting for changes in working capital and adding back non-cash items like depreciation and amortization. This section includes cash inflows and outflows related to the core business activities of the company.
3. Cash flow from investing activities: Record cash used or generated from investing activities. These generally involve asset purchases and sales, investments in other companies, or loans made or received.
4. Cash flow from financing activities: This section accounts for cash inflows and outflows arising from transactions with the company's owners and creditors, such as issuing stocks, paying dividends, or borrowing loans.

The correct answer is option (D), (A), (C), (B), which aligns the steps in this logical order.

Answer 2

Preparing a Statement of Cash Flows involves following a specific sequence of steps, guided by accounting standards, to ensure accuracy and completeness. This sequence builds upon the information derived from previous steps.

Steps in Preparing a Cash Flow Statement

1. (D) Calculate Net Profit Before Tax and Extraordinary Items:
   • Description: This is the starting point for determining cash flows from operating activities (under the indirect method). It involves calculating net profit before accounting for income taxes and any extraordinary gains or losses.
2. (A) Net Cash Flow from Operating Activities:
   • Description: This section determines the cash flows generated from the company's core business operations. It involves adjusting the net profit before tax for non-cash items (e.g., depreciation), changes in working capital (e.g., accounts receivable, inventory, accounts payable), and other operating-related activities.
3. (C) Cash Flow from Investing Activities:
   • Description: This section records cash flows related to the purchase and sale of long-term assets, such as property, plant, and equipment (PP&E), as well as investments in securities.
4. (B) Cash Flow from Financing Activities:
   • Description: This section includes cash flows related to how the company is financed, such as issuing or repaying debt, issuing or repurchasing stock, and paying dividends.

Correct Sequence

Therefore, the correct sequence is (D), (A), (C), (B).