The Statement of Cash Flows

The Statement of Cash Flows presented by a company, provides information about the cash inflows and outflows within a certain period of time, and it can predict the future cash flows of the company. It keeps track of company’s cash and categorizes it into either operating activities, investing activities, or financing activities.

Operating activities use the items located on the income statement and convert them from accrual basis to cash basis accounting. Investing activities show the purchases and sales of long term investments. Financing activities show the changes in long term liability and stockholders equity accounts. Paying dividends is also displayed under financing activities. With that said, all three types of activities are shown on the Statement of Cash Flows.

This statement is very useful for a company itself, as well as future employees and outside companies looking in. People want to see a future employer that has a lot of cash, brings in a lot of revenue, and has minimum expenses. The Statement of Cash Flows can show these future employees where the cash is coming from and where it is going.

When preparing the Statement of Cash Flows, the company uses information from comparative balance sheets, the current income statement, and specific transaction data related. Comparative Balance Sheets allow the company to compare the assets, liabilities and stockholders’ equity from one year to the next. The current income statement provides the net income, which is the first calculation on this statement. Lastly, the specific transaction data related gives the company additional insight on where the cash is going or where it may have come from. For example, additional data might include facts about the company’s purchase of common stock.

There are two types of formatting a company can use to provide their Statement of Cash Flows. There is the direct method and the indirect method. The direct method is used by deducting cash disbursements from operating cash receipts. The format shows the net cash provided by operating activities. The second method, the indirect method, begins by determining the change in cash. To do so, the company finds the net cash flow from operating activities and then the net cash flows from investing and financing activities. Once they establish these three things, they are ready to prepare their finalized statement. They provide all the cash flows for each of these activities, and then it results in the net change in cash and the net cash at the end of the period.

I personally think that the indirect method provides the company and other people looking at the statement, a broader background of the inflows and outflows of cash within the company. The direct method is to the point and still useful in many business situations, but I think the detailed format of the indirect method shows so much more. As a future employee, I would look to see that the company is earning cash, and using their cash wisely within helpful operating, investing, and financing activities. Having the stability as a company to make a profit is the main goal of any organization. It is a very important task to achieve, and the Statement of Cash Flows is one way to illustrate that type of success. Like mentioned before, it relies heavily on other statements and data. As a whole the financial statements of a company are crucial, and what is even more important is that they correctly display the company’s financials.

The Statement of Cash Flows is an important piece of a company’s financial statements. It shows the company’s inflows and outflows of cash and what future cash will look like for the company. The information comes from three major sources and there are two methods of preparing the statement. The first method is called the direct method, and the second method is called the indirect method. I prefer the indirect method because it is more detailed and revealing. It also provides a link between itself, the Income Statement and the Statement of Financial Position. Overall, it is successful and important way of analyzing a company’s handle on cash, and employees should take a look into their future employer’s Statement of Cash Flows.

Where Did All My Money Go? Understanding the Statement of Cash Flows

If you’re like most QuickBooks users, you rely on the Profit & Loss Standard report to monitor how your business is doing. However, you may have noticed that it rarely, if ever coincides with what’s in your bank account (hint: it’s not supposed to). An overlooked, yet valuable report, is the Statement of Cash Flows. The Profit & Loss Standard (P&L), provides only partial insight into the health of your business – what you earned and spent. The Statement of Cash Flows explains your change in cash on hand.

Cash versus Accrual

Unlike some accounting packages, QuickBooks allows you to run most reports on either the cash or accrual basis. Cash-basis means that transactions don’t appear on your Profit & Loss statement until either your customer pays their invoice or you pay a vendor (or employee). So, if you enter a bill in QuickBooks to be paid later, the expense won’t immediately appear on a cash-basis P&L. Similarly, invoices that you send to customers won’t immediately appear on a cash-basis P&L. The expense appears when you write a check to the vendor, and the revenue appears when the customer pays their invoice. Accordingly, cash-basis reports don’t necessarily report a company’s true financial performance. You could have a stellar looking Profit & Loss Report, but a bunch of unpaid bills in QuickBooks. For that reason, many accountants prefer that business owners use accrual-basis reports.

Accrual-basis reports recognize the effect of every transaction on your P&L immediately. Customer invoices appear on accrual- basis P&L reports as soon as you save the transaction, as do unpaid vendor bills.

Accrual-basis reports provide a much better picture of where the business stands, but can make it harder to understand your current cash position. However, a cash-basis P&L isn’t the panacea for managing cash flow. Your business has many transactions that affect your Balance Sheet instead of the P&L, such as loan payments or owner distributions. (Remember, the Balance sheet tracks assets, liabilities, and equity.) The Statement of Cash Flows explains your change in actual cash balance based on all your cash transactions – whether they affect the Balance Sheet or P & L, making it a great addition to Balance Sheet and P & L. (Audited financial statements are required to show all 3 reports.) So let’s take a closer look.

The Statement of Cash Flows

Suppose your cash balance at the beginning of your fiscal year was $100,000, and today it is $75,000. The net income figure on your P&L won’t give you the full details on why your cash balance decreased, but the Statement of Cash Flows will. To do so, choose Reports > Company & Financial > Statement of Cash Flows.

This report automatically defaults to This Fiscal Year-To-Date, but you can choose another time period if you wish. If this is your first time, I recommend starting with 1 month, (no more than 1 quarter), until you are more comfortable with reading it.

Your Statement of Cash Flows report will include up to three major sections. (Don’t worry if your report only includes one or two of these sections – sections appear only when you had relevant transactions during the report period.

1. Operating Activities
2. Investing Activities
3. Financing Activities

Operating Activities

The Operating Activities section of the Statement of Cash Flows recaps activities related to running your business. This section will always start with Net Income (comes from the bottom line of your accrual-based P & L), followed by an Adjustments section. The Adjustments add or deduct to your Net Income. For instance, Net income is $112,999 but the Net Cash from Operating Activities is $42,584. The Statement of Cash Flows identifies the $70,415 difference. Let’s take a look at a few of the items:

Accounts Receivable (-$71,759): During the report period we sent invoices to our customers, of which $71,759 remain unpaid. Because we included these invoices as income in our P & L but have not actually received the payment, QuickBooks deducts them from the Net Income from the P & L.

Inventory Asset (-$17,354): Amounts that we spend on inventory don’t become part of Net Income on our P & L until we’ve sold the items. At that point QuickBooks posts the expense to Cost of Goods Sold, and reduces our inventory account accordingly. But in this instance, we paid cash to purchase our inventory, so we deduct that amount is deducted on our Statement of Cash Flows.

Remember: The purpose of the Statement of Cash Flows is to reconcile our Net Income with the actual change in our cash account(s). Thus non-cash activities, such as unpaid customer invoices or amortized prepaid expenses get subtracted or added from Net Income, so that you can get a clear picture of where cash went during the report period.

Accounts Payable ($13,537): We’ve entered bills into QuickBooks totaling $13,537 that we haven’t paid yet. While we deduct it on the accrual P & L, because we have not actually spent the money to pay those bills, we add that cash back in.

Federal Withholding: ($1,364): We’ve withheld income tax from employee paychecks in QuickBooks totaling $1,364 but we haven’t paid it yet, so we add that unpaid “deduction/liability” to our cash.

Want to know where QuickBooks got these numbers? Simply double-click the number in question to get a more detailed report.

Investing and Financing Activities

As you look at the Statement of Cash Flows, you may also see one or two other sections:

Investing activities may include owner contributions as a source of cash.

Financing activities will show borrowing on a line of credit or other loan as a source of cash, while loan repayments (excluding interest) will appear as uses of cash. In the end, you’ll see exactly what caused your cash balance to increase or decrease during the report period.

Organizing the Statement of Cash Flows

QuickBooks makes an educated guess at what accounts in your Chart of Accounts should appear on the Statement of Cash Flows. You may want your accountant to review this report to see if you need to change what accounts appear and in which section on the report. If there needs to be any change(s), simply click the Classify Cash button then enter a checkmark in the appropriate column for the account(s) in question.

So next time you want to figure out why your bank balance and cash-based P & L don’t seem to agree, take a look at your Statement of Cash Flow. I will admit, to those who don’t have accounting backgrounds, this may look a little confusing the first time or two (or three) that you look at it, but hopefully this article will help you understand it and you can get a better handle on your cash flow. If you have questions, feel free to contact us or your accountant.

Muir & Associates helps businesses use their Intuit products more efficiently and more effectively so businesses can focus on their business and make more informed decisions. We provide sales and support services. Monica Mitchell Muir has been helping businesses with their QuickBooks products since 1996.

Become Familiar with the Statement of Cash Flows

Many people are familiar with two important financial statements, the Profit and Loss and the Balance Sheet. Fewer of them recognize the Statement of Cash Flows (also referred to as the Sources and Uses Statement). Additionally, while the physical layout of the statement has many variations, the general content is constant. It will be reviewed here. We will also discuss what makes up the statement, what it is used for and some limits.

The Statement of Cash Flows looks at three different cash activities: the operating, investing and financing activities. From the activities, cash is either received (called inflows) or spent (called outflows).

Cash flows from the operating activities are those generated or spent on the main business of the entity. These might be from the sale of products or services. If products are sold or services are rendered, cash will be received for the activity. If goods are purchased for sale, or to add new inventory, then cash is spent. Additional inflows of cash are received from interest or dividend payments and collections on accounts too. Outflows of cash, besides payments to suppliers, could be payments on accounts payable, interest payments, employee salaries and taxes. A positive result from operating activities would result in a profit (net income). Conversely, a negative result would be a loss (net loss).

The second cash flow producing activity is from investing activities. These activities have both positive and negative cash flows. Investing, as used on this statement, represents those activities undertaken to make additional cash for the entity. Typical of these are making loans, receiving payments on previous loans and purchasing or selling of assets (e.g., buildings, equipment, land, patents, or copyrights). Again the net value of inflows and outflows are contributed directly from entity activities.

The final activity is the result of generating more usable cash to be used in the business. Financing activities relate to borrowing of money and in general are related to acquiring or returning capital. Common inflow activities are issuing new securities, bonds, mortgages, or notes. Outflows result from repurchasing securities or retiring debts. Also, this category includes dividends paid to stockholders.

What does this statement tell us? It is used for many types of analysis. It is a useful metric on the entity’s ability to take advantage of new potential investments, maintain or increase the current level of operations and to replace or modernize assets.

The statement does have some limitations. As a comparison tool, it is only significant when used to compare similar entities because different industries have different structures. Too, if the entity has large, long-term debt structures, the usefulness of the statement has limited applicability. It could, however, be used to judge whether debt commitments can be met without debt restructuring. Because this statement is historical, great care should be taken when projecting future results based on it. There is no guarantee that the results will continue in the future.

Ultimately, the cash flow statement gives us great insight into how cash is obtained and used during the statement period. Interestingly, the statement will be found, in some form, in a stock prospectus. So, it stands along side the other two critical statements of entity position, the Profit and Loss and the Balance Sheet. It is important when reviewing entity operations that we carefully consider this statement along with the others to get a clear picture of the cash flow position

Accounting Financial Statements – The Statement of Cash Flows

A statement of cash flows, or cash flow statement in financial accounting is a financial statement that illustrates how variations in income and balance sheet accounts affect cash equivalents and cash. The analysis is broken down to investing, operating, and financing activities. In essence, the cash flow statement is primarily concerned with the flow of money both in and out of the business. The statement portrays the accompanying changes in the balance sheet as well as the current operating results. As a tool for analysis, the cash flow statement has been proven useful in its ability to determine the short-term viability of a particular company, especially its capability to pay bills.

International Accounting Standard 7 is the international accounting standard that deals specifically with cash flow statements. The list of groups and people who take interest in cash flow statements consists of accounting staff, whose job it is to be aware of whether the business will be able to cover its expenses, both potential lenders and creditors, who want solid evidence of a business’s capability to repay loans, potential investors, who need evidence of a company’s financial stability, potential employees, who need verification that their salaries will be paid, finally, shareholders of the business.

The cash flow statement was initially referred to as the flow of cash statement. The statement is a depiction of a business’s liquidity. The balance sheet is a small illustration of a business’s financial stability and liabilities at any given point in time, and the income statement provides a summary of a business’s monetary transactions over a duration of time. The two financial statements just mentioned are a reflection of the accrual basis of accounting used by businesses to coordinate revenues with their associated expenses. The cash flow statement provides only inflows and outflows of cash equivalents and cash. This means that transactions that have no direct effect on payments and cash receipts are excluded. Among the excluded transactions are depreciation or write-offs on crippling debts or credit loss.

This statement is a cash basis report on three distinct kinds of financial activities, which are investing activities, operating activities, and financing activities. Activities that do not require cash are generally shown in footnotes, and this occurs both under IAS 7 and US General Accepted Accounting Principles. However, GAAP gives the option of including the non-cash activity within the actual cash flow statement, whereas IAS 7 does not. Included under non-cash financing activities are changing debt to equity, leasing in order to buy an asset, making an exchange of non-cash assets/liabilities for other liabilities or non-cash assets, and bestowing shares as a trade for assets. This statement has four main purposes: to provide insight on a business’s solvency and liquidity and its capability to alter cash flows in the future, aid in the evaluation of changes in liabilities, equity, and assets, eliminate effects of differing accounting methods by standardizing, and provide insight into future cash flows regarding their timing, probability, and amount. The cash flow statement does away with allocations, which could be byproducts of differing accounting methods, and therefore has been adopted as a standard financial statement.

Now, the two methods (direct and indirect) of creating these statements will be addressed.

The direct method of readying a this statement depicts a report which is more clearly understood than the indirect method, which is pretty much universally utilized, due to the fact that FAS 95 states that companies must provide an additional report similar to the indirect method should they choose to utilize the direct method.

The direct method reports major classes of payments and gross cash receipts. Under the rules set forth by IAS 7, received dividends can be shown under either investing or operating activities. If paid taxes are directly connected to operating activities, then that is where they are reported. If paid taxes are directly connected to financial or investing activities, then that is where they are reported. GAAP (Generally Accepted Accounting Principles) are different from IFRS (International Financial Reporting Standards) because under GAAP rules, dividends received through a business’s investing activities is actually reported under the operations activities instead of investing activities.

The indirect method makes its starting point net income, adjusts for all non-cash item transactions, then adjusts from every cash based transaction. Away from net income is taken an increase in an asset account, and given to it is an increase in a liability account. This method turns accrual-basis net income/loss into cash flow by utilizing a system of deductions and additions.

The direct method calculates cash flow from operations from scratch, while the indirect method takes net income and makes adjustments in order to calculate cash flow from operations.

What Is a Statement of Cash Flow?

The statement of cash flow is one of four traditional financial statements, which form the foundation of financial accounting. A financial statement is produced by a business to report specific accounting information such as current assets, liabilities, revenues, expenses, and net income. The primary purpose of the statement of cash flow is to provide financial information about the cash receipts and cash payments of a business for a specific time period.

The Structure of the Statement of Cash Flow
Cash flow is determined by looking at the three different categories included on a statement of cash flows: (1) Operating Activities, (2) Investing Activities, and (3) Financing Activities.

Operating Activities: include cash inflow and outflow from day-to-day business operations; e.g., selling goods and services, buying inventory, or paying taxes.

Investing Activities: include cash inflow and outflow from (1) changes in investments and long-term assets and (2) lending money or receiving loan payments; e.g., buying or selling property, plant, or equipment.

Financing Activities: include cash related to financing the business. This can mean a business issues debt or repays the amounts borrowed or obtains cash from stockholders and pays them dividends; e.g., selling bonds, issuing stocks, or paying out dividends.

Uses of the SCF (Statement of Cash Flow)
The statement of cash flow is very useful for investors, creditors, and other interested parties who want to know what is happening to the cash of a business. A SCF shows executives and others where cash is coming from, what it is being spent on, and how the cash balance has changed. By looking at a SCF, one can predict the future financial health of a company.

Relationship Between the SCF and Other Statements
The SCF complements a company’s balance sheet and income statement. The balance sheet shows the net balance of the cash account at the end of a period. The SCF gives a detailed description of how that amount shown on the balance sheet changed during the period. The net income figure on the income statement is the figure from which the information on the SCF is deduced.

The SCF is the best tool to use when trying to determine the cash situation of a company. Where is the cash coming from? Where is it going? How does our future cash flow look? All these questions can be answered by examining the statement of cash flows of a business. As one of the four core financial statements, an SCF can be a useful tool to ensure the success of a business.

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