state why non cash transactions are ignored while preparing cash flow statement ?
Non-cash transactions are ignored while preparing a cash flow statement (based on Cash Basis of Accounting) because these transactions do not involve any cash inflow or outflow (cash position of the company remains intact or unaffected). These are taken into consideration while preparing Statement of Profit or Loss (like depreciation, loss on sale of fixed assets, profit on sale of fixed assets etc). Therefore, at the time of preparing a cash flow statement these are added back to (if expense) and deducted from (if income) Net Profit (ascertained from Statement of Profit/Loss) so that profit excluding all non Cash transactions (whether income or expense) can be worked out.