Since 1987, a cash flow statement has been a required part of a company’s financial reports.
If you’re running a business, you might be wondering how to create this statement to stay in good legal standing.
Thankfully, we have all the information you need right here! Keep reading to learn more about this statement and to find some good cash flow statement examples.,
Structure of a Cash Flow Statement (CFS)
There are four main parts of a CFS. They are:
- Cash from operating activities
- Cash from investing activities
- Cash from financing activities
- Disclosure of noncash activities
This is different than your income statement and your balance sheet because it won’t have the amount of your future cash flow that was recorded on credit. To learn more about credit vs debit, click here.
How to Calculate It
There are two main ways to calculate your cash flow by adjusting your net income.
You can make these adjustments because non-cash items get calculated into your net income and total liabilities. However, that doesn’t mean all of your transactions will have actual cash items on them.
In general, this is a good formula to follow. You will add your purchase or sale of long-term assets with your purchase or sale of your other business, or your purchase or sale of marketable securities.
Because of this, you can use two main methods to calculate your cash flow: a direct or indirect cash flow method.
Direct Cash Flow Method
The direct cash flow calculation method will add up all of your cash payments and receipts.
This includes any cash you paid to your suppliers, customers, and your employee’s salary. You’ll calculate these figures by using your monthly beginning and ending balances from all of your accounts.
From there, you’ll be able to look at the increase or decrease in your accounts.
Indirect Cash Flow Method
The indirect cash flow method is calculated by using the net income. You can find this on your company’s income statement.
Your income statement should’ve been prepared using an accrual basis, so the revenue on there will only matter depending on when you earned it rather than when you received it.
That’s why your net income might not be the best picture for your net cash flow from your operating activities, so you’ll have to adjust your earning.
With the indirect method, you’ll make those adjustments to add your non-operating activities that won’t affect your operating cash flow. For example, depreciation can’t be used as a cash expense. But it’s still added back in for calculating your cash flow because you’ll deduct it from your assets.
Now let’s look at a one-month example of an already existing cash flow statement.
In this example, your net income will be $70,000.
Under your additions to the cash section, you’ll have a $10,000 depreciation. But your increase in accounts payable will be negative $10,000.
Your subtractions from cash will have three lines under them. That includes your increase in account receivable which is negative $20,000. Your increase in inventory will be negative $20,000. Your net cash from operations will also be negative $40,000.
Your cash flow from investing section will have the purchase of equipment, which will knock you back negative $10,000.
Now we can closely look at three examples of how you can get those numbers.
1. Operating Expenses
Under depreciation, you’ll find the $10,000 from your expenses. This comes from your income statement, and you’ll list it as income on your statement. Since you won’t have any cash leaving your hands, it will actually turn back into the $10,000 cash on hand.
In your increase in accounts receivable, you’ll have a $20,000 growth. That is any money that you will charge the clients, even if they haven’t paid it to you yet.
This is listed as an asset because you don’t actually have the cash in hand.
For the $20,000 increase in inventory, this means that paid out $20,000 to get $20,000 worth of inventory. This isn’t really an asset because you can’t spend the money, so you’ll have to deduct that $20,000.
2. Investing Expenses
Under your investments, you’ll list things like any real estate, land, equipment, or liquidated financial assets that you acquired. If you spend cash on that investment, that cash will convert to the equal value of that asset.
For example, if you paid $10,000 for equipment, then you’ll lose $10,000 in cash. However, now you’ll be able to list $10,000 worth of equipment on your statement.
Under this section, you’ll reverse the investments, getting rid of the cash and turning it into an asset.
If you’re a small business, you likely won’t have a lot of this cash flow, but you still need to record it since it will count toward any working capital you have.
3. Financing Expenses
In your financing activities, you’ll see that your notes payable is actually a liability. When you receive a loan, that becomes cash flow into your business, but the opposite happens if you’re taking out the loan.
Since you received proceeds from a loan, you’ll record it as an increase to how much cash you actually have available.
Discover More Cash Flow Statement Examples
These are only a few of the cash flow statement examples, but there are many more out there that you can use for your business!
We know that running a business can be stressful and overwhelming, but you don’t have to figure it out on your own. We’re here to help you out!
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