Deal Pack Blog

What is a Cash Flow Statement?

The advantage of real time accounting gives Deal Pack customers the ability to pull accurate Financial Statements at the drop of a hat. Even if you have minimal knowledge of accounting principles, it’s easy enough to figure out that the Balance Sheet shows your assets and liabilities, and that the Income Statement reflects your profit & loss. But there’s one report that many have difficulties deciphering, and that report is the Statement of Cash Flows.

 

The Statement of Cash Flows or Cash Flow Statement (CFS) is a financial accounting statement that reflects how changes in balance sheet accounts (assets and liabilities) and income affect cash and cash equivalents. The standard CFS is separated into three sections; operating activities, investing activities, and financing activities. The report covers a time frame of one accounting period, thus measuring the cash flow from one accounting period to another.

 

As an analytical tool, the CFS is ideal for determining short term sustainability of a company as well as the movement of cash and cash equivalents in and out of the business.  It is a required financial statement report and often a report of interest for potential lenders, inventors, and shareholders.

 

Understanding the purpose behind the CFS is great, but how does one actually read this report to make sense of it? It is important to first comprehend the format of the report. As explained earlier, the CFS is separated into three business activities. Typically, the activities are grouped by an alphabetic value with operating activities, investing activities, and financing activities placed into groups A, B, and C, respectively.

 

Operating Activities – Accounts to be selected as Operating activities should include Current Assets and Current Liabilities such as Accounts Receivable, Accounts Payable, and Inventory.  Income Statement Accounts with no Effect on Cash such as Bad Debts Expense must also be set up as Operating Activities.

 

Investing Activities – Investing Activities are a report of the purchase and sale of long term investments and property, plant, and equipment.  A good example of an Investing Activity would be a fixed asset such as a building, or an investment account that will be held for longer than a year.

 

Financing Activities – Financing activities include all activities used to finance a company’s operations.  This includes inflows of cash from investors, banks, or other financing sources, as well as the outflows of cash to pay back long term loans, or issue dividends to investors.  Examples of accounts to be selected are long term notes not due for over a year, or owner’s equity accounts.

 

The report starts by presenting the net income for the period. If you were running a cash business, the net income would be the only necessary piece of information to analyze cash flow. However, capitalized assets and the existence of liabilities force us to consider other factors to determine our cash flow. Next, the net income is adjusted by the change in operating, investing, and financing activities from the previous period to the current period. Our result is a statement that reflects the flow of cash equivalents for a given accounting period. For assistance in setting up and running the Statement of Cash Flows in your Deal Pack contact the Deal Pack team!

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