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Financials – Statement of Cash Flows

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The Cash Flow Statement (Statement of Cash Flows) provides an overview of the way Funds move through an Entity, how they impact Overall Value and eventually reconcile with Cash Balances and determine Net Cash Flow in any given year.  There are formatting methods for the Cash Flow Statement, I demonstrate the Indirect Method in this post because it is the method preferred by most analysts.

The Cash Flow Statement is essentially the same as a yearly Balance Sheet – it’s just organized a little bit differently and is more summarized.  The Balance Sheet accumulates its amounts from the beginning, the Cash Flow Statement only accumulates its balances over one business year.  Since the Balance Sheet Accounts carry their balances from year to year, the Cash Flow Statement presents its amounts as either Increases or Decreases to groups of Accounts throughout the year.

Balance Sheet:

The Balance Sheet uses the three categories: Assets, Liabilities and Equity.

  • Assets
    • Current Assets (including Cash)
    • Fixed Assets (Net of Accumulated Depreciation)
  • Liabilities
    • Current Liabilities
    • Long Term Liabilities
  • Equity
    • Owners’ Capital (Contributions, Stock and Paid in Capital)
    • Retained Earnings
    • Net Income

Cash Flow Statement:

You’ve heard the term “Bottom Line” well, that term refers to the end result – the numbers at the bottom of the page.  Since the end result of the Cash Flow Statement is Net Cash, it is at the bottom of the report and everything else on the report funnels down to the bottom to come to the final Net Cash number.

The Cash Flow Statement uses the three categories: Operating, Investing and Financing.

  • Operating Activities
    • Net Income
    • + Depreciation Expense (and other non-cash expenses)
    • + Increases in Current Liabilities
    • + Decreases in Current Assets
    • – Increases in Current Assets
    • – Decreases in Current Liabilities
  • Investing Activities
    • + Decreases in Long Term/Fixed Assets (Independent of Accumulated Depreciation)
    • – Increases in Long Term/Fixed Assets (Independent of Accumulated Depreciation)
  • Financing Activities
    • + Increases in Long Term Liabilities/Debt
    • – Decreases in Long Term Liabilities/Debt
    • + Increases in Owners’ Capital
    • – Decreases in Owners’ Capital
    • – Increases in Dividends
  • Cash (Beginning Cash Balance – Net Increase/Decrease = Ending Cash Balance)

The net contribution to cash is summarized for each section and then combined to equal Net Cash Flow.  Net Cash Flow is then combined with the Beginning Cash Balance to reconcile to the Ending Cash Balance for the year.  Net Cash Flow is the difference between the Beginning and Ending Cash Balances.

The Cash Flow Statement is an important indicator of available cash for operations but also of how an entity is generating cash, if it is able to sustain itself and its growth through its operations or if it generated cash through increased debt and equity and/or decreased capital assets.

Statement of Cash Flows (Including Depreciation Entries from Balance Sheet Post)

Statement of Cash Flows
Cash Flows From Operating Activities
Net Income $45,104
Depreciation $496
Increase in Payables $1,700
Net Cash Provided by Operating Activities $47,300
Cash Flows From Investing Activities
Increase in Fixed Assets -$2,950
Net Cash Used by Investing Activities -$2,950
Cash Flows From Financing Activities
Net Cash Provided by Financing Activities $0
Increase in Cash and Cash Equivalents (Net Cash Flow)
Cash and Cash Equivalents at Beginning of Year $0
Cash and Cash Equivalents at End of Year $44,350

Remember that accrual accounting records revenues and expenses when they are earned or incurred regardless of when the related Cash is either received or disbursed.  This means that the amounts due for Payables or Receivables have impacted the Financials but have not yet impacted Net Cash Flow and so they must be added back to Net Cash Flow for Payables and deducted from Net Cash Flow for Receivables.

Next up: >> Cost of Goods Sold and Inventory

<< Financial Statements – Balance Sheet

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.