Statement of Cash Flows defined

The Statement of Cash Flows is a basic financial statement, required in a company's annual report. It explains the changes in cash and cash equivalents during a period. It also reconciles net income with cash flows from operations.

Statement of Cash Flows is presented by classifying business activities as Operating, Investing and Financing.

There are two methods of presenting Statement of Cash flows; direct or indirect method.

  • In the direct method, cash flows are reported by major classes of receipts and payments, resulting in a net amount.
  • In the indirect method, a business reports net cash flows indirectly by adjusting net income to net cash flows from operating activities. AccountEdge uses the indirect method.

In the indirect method, Adjustments are made to the profit for non-cash expenses such as depreciation, gains and losses on disposal of assets, for changes in working capital such as inventories, receivables, payables and other items to arrive at cash flows from operations.

The Statement of Cash Flows classifies business activities resulting from operating, investing and financing activities.

  • Operating activities are those that involve the production and sale of merchandise or the performance of services. Examples of operating cash inflows are cash sales, collections of receivables, cash received from interest. Cash outflows from operations include cash paid to buy raw materials, payments to suppliers, employee payroll taxes paid. Investing Activities include making and collecting loans, buying and selling debt and equity securities, and acquiring and disposing of property, plant and equipment.
  • Cash inflow from investing activities includes collection of loan principal, sale of debt or securities of other entities, and sale of property/plant and equipment. Cash outflows from investing activities include making loans to other entities, buying debt and securities and purchase of plant property and equipment.
  • Financing activities apply to receiving equity funds and providing owners with a return on their investments. It includes the issuing and paying off of corporate debt. Cash inflows from financing include funds obtained from issuing debt. Cash outflow includes the payment of dividends, paying principal payments on long-term debts and purchasing treasury stock.

How the Statement of Cash Flows (SCF) is calculated in AccountEdge

First, generate the following Reports:

  • A Profit and Loss Statement (Account tab) for the time period in which you wish to generate a Cash flows Statement. Let's make this October.
  • A Balance Sheet (Account tab) including the period for which you wish to generate the SCF, and for the period just prior to that. For example: If you want an October Statement of Cash Flows, run a Balance sheet spreadsheet including September and October.
  • Finally, generate the Statement of Cash Flow (Banking tab).

The first figure on the SCF is the Net Profit/Loss figure from the Profit and Loss. This is the starting point for the Statement of Cash Flows.

Next, using the Balance Sheet, AccountEdge calculates the differences in assets, liabilities and equities between the report period and the period just prior. In our example, we compare asset and liability balances on September 30 to their balances at the end of October. Asset increases are subtracted from and decreases are added to the net income. For liabilities and equities, increases in balances are added to the net income, while decreases in liability and equity balances are subtracted from the net income.

This process is performed on all accounts classified as Operating, Investing or Financing. Other than banking and credit card accounts, all Balance Sheet accounts must be classified for the Statement of Cash Flows as either Operating, Investing or Financing. A sub-total for each of these 3 classifications is listed on the Statement of Cash Flows. The total of all 3 classifications equals the net change in cash for the reporting period. The Cash at the end of the period on the SCF reconciles with the Total Cash on Hand on the Balance Sheet for the same period.