The cash flow statement is one of the primary financial statements used in business operations, including small businesses. Creating a cash flow statement illustrates the amount of cash the business generated during the reporting period. The cash flow statement also details the cash used during the period, helping management see where the money is going and differs. The cash flow statement consists of three primary sections plus an optional supplemental section. It shows how much money is available for your business to finance continued operations and growth. Show
A cash flow statement consists of three sections exploring operating activities, investing activities, financing activities and also features supplemental information in a special section.
The first section of the cash flow statement illustrates the cash your business received and used during normal operating activities. This section details the changes in the ledger account balances for your current assets and current liabilities. These accounts are accounts payable, accounts receivable, prepaid insurance and unearned revenues. When you sell products or services, that activity is reported here.
The second section is dedicated to investment activity. All of your company's investments are listed under this category. Any purchase or sale of property, equipment and plants also qualify under the investment section. The ledger accounts to review for this section include the long-term investments account, vehicles, capital equipment accounts, land and buildings.
If you run a cafe or restaurant, buying a new grill or oven would qualify under this section. Report any equipment you buy for your regular business operations here.
The third section of the cash flow statement lists the information for the company's financing activities. Financing activities include purchases of bonds and stock as well as dividend payments. Some of the applicable ledger accounts include your capital equipment and paid-in capital accounts, notes and bonds payable, stock and retained earnings.
For a small business, one of the most common financing activities for this section is from the Small Business Administration. If you secured an SBA loan to help you establish or grow your business, that loan should be reported here.
Any information that relates to interest earned on an interest-bearing account or the amount of income taxes paid in a reporting period is classified under a supplemental section at the end of the cash flow statement. This section is also used to record any significant exchanges that did not involve a cash transaction, such as exchanging stock. Small businesses may not record stock, but if you use an interest-bearing business bank account, you should report that information here.
May 04, 2022 May 04, 2022/ The statement of cash flows is one of the financial statements issued by a business, and describes the cash flows into and out of the organization. Its particular focus is on the types of activities that create and use cash, which are operations, investments, and financing. A smaller organization may not release a statement of cash flows for internal use, preferring to only issue an income statement and balance sheet. However, it is a required part of the audited financial statements that are released to lenders, creditors, regulators, and investors. How to Use the Statement of Cash FlowsThe statement of cash flows can be used to discern trends in business performance that are not readily apparent in the rest of the financial statements. It is especially useful when there is a divergence between the amount of profits reported and the amount of net cash flow generated by operations. Many investors feel that the statement of cash flows is the most transparent of the financial statements (i.e., most difficult to fudge), and so they tend to rely upon it more than the other financial statements to discern the true performance of a business. They can use it to determine the sources and uses of cash. There can be significant differences between the results shown in the income statement and the cash flows in this statement, for the following reasons:
Cash flows in the statement are divided into the following three areas:
The Direct MethodThere are two ways in which to present the statement of cash flows, which are the direct method and the indirect method. The direct method requires an organization to present cash flow information that is directly associated with the items triggering cash flows, such as:
The Indirect MethodFew organization collect information as required for the direct method, so they instead use the indirect method. Under the indirect approach, the statement begins with the net income or loss reported on the company's income statement, and then makes a series of adjustments to this figure to arrive at the amount of net cash provided by operating activities. These adjustments typically include the following:
Terms Similar to the Statement of Cash FlowsThe statement of cash flows is also known as the cash flow statement. May 04, 2022/
A reconciliation of the cash generated and used in a period A Cash Flow Statement (also called the Statement of Cash Flows) shows how much cash is generated and used during a given time period. It is one of the main financial statements analysts use in building a three statement model. The main categories found in a cash flow statement are (1) operating activities, (2) investing activities, and (3) financing activities of a company and are organized respectively. The total cash provided from or used by each of the three activities is summed to arrive at the total change in cash for the period, which is then added to the opening cash balance to arrive at the cash flow statement’s bottom line, the closing cash balance. One of the primary reasons cash inflows and outflows are observed is to compare the cash from operations to net income. This comparison helps company management, analysts, and investors to gauge how well a company is running its operations. The cash flow statement reflects the actual amount of money the company receives from its operations. The reason for the difference between cash and profit is because the income statement is prepared under the accrual basis of accounting, where it matches revenues and expenses for the accounting period, even though revenues may actually not have yet been collected and expenses may not have yet been paid. In contrast, the cash flow statement only recognizes cash that has actually been received or disbursed. Image: CFI Financial Modeling Courses. Download the Free TemplateEnter your name and email in the form below and download the free template now! Below is a breakdown of each section in a statement of cash flows. While each company will have its own unique line items, the general setup is usually the same. This guide will give you a good overview of what to look for when analyzing a company. #1 Operating Cash FlowThe cash flow statement begins with Cash Flow from Operating Activities. It starts with net income or loss, followed by additions to or subtractions from that amount to adjust the net income to a total cash flow figure. What is added or subtracted are changes in the account balances of items found in current assets and current liabilities on the balance sheet, as well as non-cash accounts (e.g., stock-based compensation). We then arrive at the cash version of a company’s net income. Net Earnings This amount is the bottom line of an income statement. Net income or earnings shows the profitability of a company over a period of time. It is calculated by taking total revenues and subtracting from them the COGS and total expenses, which includes SG&A, Depreciation and Amortization, interest, etc. Plus: Depreciation and Amortization (D&A) The value of various assets declines over time when used in a business. As a result, D&A are expenses that allocate the cost of an asset over its useful life. Depreciation involves tangible assets such as buildings, machinery, and equipment, whereas amortization involves intangible assets such as patents, copyrights, goodwill, and software. D&A reduces net income in the income statement. However, we add this back into the cash flow statement to adjust net income because these are non-cash expenses. In other words, no cash transactions are involved. Less: Changes in working capital Working capital represents the difference between a company’s current assets and current liabilities. Any changes in current assets (other than cash) and current liabilities affect the cash balance in operating activities. For instance, when a company buys more inventory, current assets increase. This positive change in inventory is subtracted from net income because it is seen as a cash outflow. It’s the same case for accounts receivable. When it increases, it means the company sold their goods on credit. There was no cash transaction, so accounts receivable is also subtracted from net income. On the other hand, if a current liability item such as accounts payable increases, this is considered a cash inflow because the company has more cash to keep in its business. This is then added to net income. Cash from operations When all the adjustments have been made, we arrive at the net cash provided by the company’s operating activities. This is not a replacement for net income, but rather a summary of how much cash is generated from the company’s core business. #2 Investing Cash FlowThis category on the statement of cash flows is referred to as Cash Flow from Investing Activities and reports changes in capital expenditures (CapEx) and long-term investments. CapExcan refer to the purchase of property, plant, or equipment assets. Long-term investments may include debt and equity instruments of other companies. Another important item found here is acquisitions of other businesses. A key to remember is that a change in the long-term assets in the balance sheet is reported in the investing activities of the cash flow statement. Investments in Property and Equipment These CapEx investments might mean purchases of new office equipment such as computers and printers for a growing number of employees, or the purchase of new land and a building to house business operations and logistics of the company. These items are necessary to keep the company running. These investments are a cash outflow, and therefore will have a negative impact when we calculate the net increase in cash from all activities. Learn how to calculate CapEx with the CapEx formula. Cash from investing This is the total amount of cash provided by (used in) investing activities. In our example, we have a net outflow for each and every year. #3 Financing Cash FlowThis category is also called Cash Flow from Financing Activities and reports any issuance or repurchases of stocks and bonds of the company, as well as any dividend payments it makes. The changes in long-term liabilities and stockholders’ equity in the balance sheet are reported in financing activities. Issuance (repayment) of debt A company issues debt as a way to finance its operations. The more cash it has, the better, as it will be able to expand rapidly. Unlike equity, issuing debt doesn’t grant any ownership interest in the company, so it doesn’t dilute the ownership of existing shareholders. The issuance of debt is a cash inflow, because a company finds investors willing to act as lenders. However, when these investors are paid back, then the debt repayment is a cash outflow. Issuance (repayment) of equity This is another way of financing a company’s operations. Unlike debt, equity holders have some ownership stake in the business in exchange for money given to the company for use. Future earnings must be shared with these equity holders or investors. Issuance of equity is an additional source of cash, so it’s a cash inflow. Conversely, an equity repayment is a cash outflow. This is buying back, through cash payment, the equity from its investors and thereby increasing the stake held by the company itself. Cash from financing This is also called the net cash provided by (used in) financing activities. The cash from financing is calculated by summing up all the cash inflows and outflows related to changes in long-term liabilities and shareholders’ equity accounts. #4 Cash BalanceThe last section on the statement of cash flows is a reconciliation of the total cash position, which connects to the balance sheet. This is the final piece of the puzzle when linking the three financial statements. Net Increase (decrease) in Cash and Closing Cash Balance Once we have all net cash balances for each of the three sections of the cash flow statement, we sum them all up to find the net cash increase or decrease for the given time period. We then take this amount and add it to the opening cash balance to eventually arrive at the closing cash balance. This amount will be reported in the balance sheet statement under the current asset section. Opening cash balance The opening cash balance is last year’s closing cash balance. We can find this amount from last year’s cash flow statement and balance sheet statement. Real-Life Example of a Cash Flow Statement (Amazon)Below is an example of Amazon’s 2016 statement of cash flows. As you can see by the orange rectangles, there are three clear sections that add to the total change and end of period cash position. For a closer look, you can download Amazon’s financial statements here, or you can check out CFI’s Advanced Financial Modeling Course on Amazon. Source: amazon.com How to Build a Statement of Cash Flows in a Financial ModelA cash flow statement in a financial model in Excel displays both historical and projected data. Before this model can be created, we first need to have the income statement and balance sheet statement models built in Excel, since their data will ultimately drive the cash flow statement model. Image: CFI Financial Modeling Courses. As we have seen from our financial model example, it shows all the historical data in a blue font, while the forecasted data appears in a black font. The figure below just serves as a general guideline as to where to find historical data to hardcode for the line items. Additionally, it shows where we find, in the financial model, the calculated or reference data to fill up the forecast period section. When all three statements are built in Excel, we now have what we call a “Three Statement Model”. Below is a summary of how to build a statement of cash flows in Excel.
Video Explanation of the Cash Flow StatementWatch this short video to quickly understand the main concepts covered in this guide, including what the cash flow statement is, how it works, and most importantly, why it matters to finance professionals. Additional ResourcesThank you for reading CFI’s guide to understanding how the cash flow statement works. To continue learning and advancing your career as a professional financial analyst, these additional CFI resources will be helpful: |