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How to Read and Understand the Statement of Cash Flows

The Statement of Cash Flows is one of the main financial statements. The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. For example, the heading may state “For the Three Months Ended December 31, 20##” or “The Fiscal Year Ended September 30, 20##”.

Note: The other financial statements are the balance sheet, income statement, and statement of stockholders’ equity.

How the Statement of Cash Flows Report is Structured

The cash flow statement organizes and reports the cash generated and used in the following categories:

  • Cash: This is your most liquid asset. That is why it is stated first on the balance sheet. The balance sheet is organized by level of liquidity. For purposes of definition for the Statement of Cash Flows, cash consists of Cash in Banks and Undeposited Funds.
  • Investing Activities: They are capital expenditures, items your company purchases for the purpose of producing goods and services. Examples would include work vehicles, trucks, warehouse, office space, etc.
  • Financing Activities: They are equity and long-term liability transactions used in the service of distributing profits, purchasing capital assets, etc.
  • Operating Activities: These represent accrued net profit and how the changes in current assets and liabilities affect cash flows.

Why Study the Statement of Cash Flows Statement?

The Statement of Cashflows shows you how your bank balance became what it is. In other words, it explains why you have the money you have (or don’t have). Many expenditures do not show up on the income statement. These can include capital expenditures (CAPEX) and many other things. A business owner might see that they have a very good net profit and believe they don’t have financial problems. Companies can run out of money, even when they are making a lot of money.

“Revenue is vanity, profit is sanity, but cash is king.”

How the Statement of Cash Flows Report Works

From a financial management context, the Statement of Cash Flows is probably the most informative of the financial statements. It reconciles accrued net income over a period to the change in cash balance over the same period. The report does this by acknowledging the bearing your organizations transactional behavior has on the inflows and outflows of cash, for example:

  1. Your company purchases machinery with cash. That is cash used in investing activities. Cash goes down Fixed Asset goes up. Your company sells a completely depreciated piece of equipment at a gain. Cash goes up, fixed assets goes down, this is cash provided by investing activities.
  2. Your company receives a small business loan. This is cash provided by financing activities. Cash goes up, Notes Payable goes up.
  3. Your company completes a job, bills for the job, but has not received payment yet. This is cash used in Operating Activities because Accrued Net Income goes up, but Accounts Receivable goes up too. Once you receive payment, AR goes down Cash Goes up. This is cash provided by operating activities.

From the preceding example, we see that almost all activities have either an explicit or implicit affect on cash. Increases in liabilities increase cash either directly (through a loan) or indirectly (Accrued Expenses in Accounts Payable frees up cash for other temporary uses).

Where to Find the Statement of Cash Flows Report

  • From the main menu, click Reports | Financials | Statement of Cash Flows, or use the Report Navigator.

Report Options

Date Filter Area

The following date filtering is available in this report.

  • Date Range: Choose from a pre-defined range of time-frames from the “Date Range” drop-down list, or enter a custom range using the “From” and “To” fields.

Other Controls

  • Cancel: The Cancel button closes the window.
  • Preview: The Preview button will show an on-screen display of the report, from which a hard-copy can be printed.  The preview screen is also capable exporting the report in a PDF format for email use.  A text search function in the preview screen can be used to locate a particular string of text.
  • Close Window on Preview: Ticking this checkbox will have the options window automatically close when the Preview button is clicked.

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