- Identify the three main components of the statement of cash flows
Unlike the other three statements that fall right off the adjusted trial balance, the statement of cash flows takes some work, some research, and a lot of thinking. It would be a lot to cover right here, so consider this lesson a primer on cash flows rather than a full course.
There are three sections to the statement of cash flows:
- Cash from operations
- Cash from investing
- Cash from financing
There are two different ways to present the statement of cash flows: the direct method and the indirect method. However, they are only different in the way they present cash from operations. The direct method reports cash receipts and disbursements as if the income statement had been prepared on a cash basis, while the indirect method starts with accrual basis net income and reconciles it to cash basis.
Here is NeatNiks’s statement of cash flows based on the direct method:
| Description | Amount | Total |
|---|---|---|
| Subcategory, Operating Activities | ||
| Cash Receipts from Customers | $3,100 | |
| Cash payments to vendors | (14,500) | |
| Cash payments to contractors | (1,100) | |
| Cash from Operating Activities | Single Line | (12,500) |
| Subcategory, Investing Activities | – | |
| Subcategory, Financing Activities | ||
| Capital Contributions | 20,000 | |
| Owner Withdrawals | (4,000) | |
| Cash from Financing Activities | Single Line | 16,000 |
| Net increase in cash | Single Line3,500 | |
| Cash at beginning of period | – | |
| Cash at end of period | Single Line $3,500 |
|
Here is NeatNiks’s statement of cash flows using the indirect method:
| Description | Amount | Total |
|---|---|---|
| Subcategory, Operating Activities | ||
| Net income | $1,350 | |
| Increase in accounts receivable | (5,650) | |
| Increase in supplies | (1,000) | |
| Increase in prepaid expenses | (10,000) | |
| Increase in accounts payable | 1,600 | |
| Increase in contractor payable | 1,200 | |
| Cash from Operating Activities | Single Line | (12,500) |
| Subcategory, Investing Activities | – | |
| Subcategory, Financing Activities | ||
| Capital Contributions | 20,000 | |
| Owner Withdrawals | (4,000) | |
| Cash from Financing Activities | Single Line | 16,000 |
| Net increase in cash | Single Line3,500 | |
| Cash at beginning of period | – | |
| Cash at end of period | Single Line $3,500 |
|
Notice that when using the indirect method, an increase in an asset reduces net income. For example, accrual basis revenues include sales on account. Cash basis doesn’t. An increase in accounts receivable means revenues under accrual basis are higher than they would be under cash basis. The adjustment from accrual to cash for an increase in accounts receivable would be negative. A decrease in an asset would be added to net income.
Alternatively, an increase in a liability indicates an expense that hasn’t actually been paid yet, so that is a deduction from net income on an accrual basis that wouldn’t exist using cash basis, so we add it back.
If that rule seems complicated (because it is) then just look it up when you need it, like all the rest of us accountants do.
As we mentioned at the start of this page, this is just the beginning. We’ll dive in deeper and learn how to prepare a statement of cash flows later in the course. For now, you should be able to identify the three main components of the statement of cash flows.