Preparing the Statement of Cash Flow

Preparing the Statement of Cash Flows

The statement of cash flows provides a detailed account of a company’s cash inflows and outflows over a specific period. It is structured to help stakeholders understand how cash is generated and used in operating, investing, and financing activities. Here’s a step-by-step guide to preparing the statement of cash flows:

1. Determine the Reporting Period

Decide on the time frame for which the cash flow statement is being prepared, typically aligned with the company’s fiscal year or quarter.

2. Gather Financial Information

Collect the necessary financial statements:

• Balance Sheet: Needed to identify changes in assets and liabilities.
• Income Statement: Provides net income and non-cash items.
• Additional Transactions: Review any significant transactions that occurred during the reporting period.

3. Choose a Method

Decide whether to use the direct method or the indirect method:

• Direct Method: Lists cash inflows and outflows directly, providing a clearer view of cash movements.
• Indirect Method: Starts with net income and adjusts for non-cash transactions and changes in working capital. This is the more common method used in practice.

4. Cash Flows from Operating Activities

A. Indirect Method Steps:

1. Start with Net Income: Use the net income figure from the income statement.
2. Adjust for Non-Cash Items:
   • Add back non-cash expenses (e.g., depreciation and amortization).
   • Subtract gains and add losses from the sale of assets.
3. Adjust for Changes in Working Capital:
   • Increase in Current Assets (e.g., accounts receivable, inventory): Subtract from net income.
   • Decrease in Current Assets: Add to net income.
   • Increase in Current Liabilities (e.g., accounts payable): Add to net income.
   • Decrease in Current Liabilities: Subtract from net income.

B. Direct Method Steps:

1. List Cash Receipts: From customers, interest, and dividends.
2. List Cash Payments: To suppliers, employees, and for operating expenses.
3. Calculate Net Cash Provided by Operating Activities: Subtract total cash payments from total cash receipts.

5. Cash Flows from Investing Activities

Identify cash inflows and outflows related to investments in long-term assets:

• Cash Inflows: Proceeds from the sale of property, equipment, and investments.
• Cash Outflows: Purchases of property, equipment, and investments.

6. Cash Flows from Financing Activities

Identify cash inflows and outflows related to obtaining and repaying capital:

• Cash Inflows: Proceeds from issuing stock or borrowing funds.
• Cash Outflows: Repayments of debt and payment of dividends.

7. Calculate Net Cash Flow

Sum the net cash flows from each of the three sections:

8. Reconcile with Cash Balances

Reconcile the calculated net cash flow with the cash balances on the balance sheet:

• Starting Cash Balance: Cash at the beginning of the period.
• Ending Cash Balance: Cash at the end of the period.
• Ensure:

9. Prepare and Present the Statement

Format the statement of cash flows, clearly dividing the three sections (operating, investing, and financing activities). Include:

• A heading with the company name, title of the statement, and reporting period.
• A summary of net cash provided or used in each section.
• Any necessary notes for non-cash investing and financing activities.

Conclusion

Preparing the statement of cash flows involves careful analysis of a company’s financial activities to provide insights into its cash management and liquidity. By following these steps, you can create a comprehensive statement that serves the needs of investors, creditors, and management. If you have further questions or need clarification, feel free to ask!