Statement of Cash Flows

  • 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.

a pile of US currency.There are three sections to the statement of cash flows:

  1. Cash from operations
  2. Cash from investing
  3. 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:

NeatNiks
Statement of Cash Flows—Direct Method
For the month ended October 31, 20XX
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:

NeatNiks
Statement of Cash Flows—Indirect Method
For the month ended October 31, 20XX
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.

Here is a bit more information:You can view the transcript for “Statement of Cash Flows Explained” here (opens in new window).

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.