Cash Flow Statement Order Explained in Simple Terms

A cash flow statement is like a report card for your business's finances, showing how well you're managing your money. It's divided into three main sections: Cash Flows from Operating Activities, Investing Activities, and Financing Activities.

The first section, Cash Flows from Operating Activities, shows the money coming in and going out from your day-to-day business operations. This includes sales, costs of goods sold, and other operating expenses.

Cash flows from operating activities can be either positive or negative. A positive cash flow means you're generating more money from your business operations than you're spending. A negative cash flow means you're spending more than you're earning.

In simple terms, the order of a cash flow statement is: Operating Activities, Investing Activities, and Financing Activities.

Suggestion: Small Business Cash Flow Problems

A cash flow statement provides a snapshot of a company's cash movements over a specific period, categorizing cash activities into operating, investing, and financing activities.

It's a crucial tool for understanding a business's liquidity and operational efficiency, which is vital for day-to-day operations and strategic planning.

The cash flow statement is created by using information from the income statement and balance sheet, and it shows how cash is generated from everyday operations, reinvested back into the business, and allocated in financing efforts.

A cash flow statement is typically broken down into three different ways: cash at beginning of period, cash at end of period, and change in cash.

To determine change in cash, simply find the difference in cash from your previous period to the current one.

There are two methods for preparing a cash flow statement: the direct method and the indirect method.

The direct method shows all cash inflows and outflows, while the indirect method starts with net income and makes adjustments to arrive at cash flow.

Here are the four rules for converting information from an income statement to a cash flow statement:

By understanding how to create and analyze cash flow statements, you can make better, more informed decisions about your business.

Calculating cash flow from operating activities is crucial, and it's done using either the direct or indirect method. The indirect method is simpler and preferred by many small businesses.

To calculate cash flow from operating activities using the indirect method, you look at the transactions recorded on your income statement and reverse some of them to see your working capital. This involves selectively backtracking your income statement to eliminate transactions that don't show the movement of cash.

Depreciation is included in expenses for the month, but it didn't actually impact cash, so you add it back to cash. Accounts payable increased by $5,500, which is a liability on the balance sheet, but the cash wasn't actually paid out for those expenses, so you add them back to cash as well.

Accounts receivable increased by $4,000, which is an asset recorded on the balance sheet, but you didn't actually receive the cash, so you remove it from cash on hand. This process helps you determine the net cash flow from operating activities.

Broaden your view: Cash Flow Statement Cheat Sheet

Here's a summary of the steps to calculate cash flow from operating activities using the indirect method:

By following these steps, you can accurately calculate your cash flow from operating activities and get a clear picture of your company's financial health.

The direct and indirect method of preparing a cash flow statement are two different approaches that can be used to present the same information. The direct method presents cash inflows and outflows on a cash basis, while the indirect method uses accrual accounting to calculate net income and then adjusts for non-cash items.

The direct method is often preferred by investors and analysts because it provides a clear and straightforward picture of a company's cash inflows and outflows. This method is also required by the Securities and Exchange Commission (SEC) for publicly traded companies.

In contrast, the indirect method can be more complex and may require additional calculations, but it can also provide a more comprehensive view of a company's financial performance.

Intriguing read: What Is the Indirect Method of Cash Flows

The direct method of calculating cash flow from operating activities is a straightforward process that involves taking all the cash collections from operations and subtracting all the cash disbursements from operations.

This approach requires keeping a record of cash as it enters and leaves your business, and using that information at the end of the month to prepare a statement of cash flow.

The direct method takes more legwork and organization than the indirect method, which is why smaller businesses typically prefer the indirect method.

You'll need to produce and track cash receipts for every cash transaction, which can be time-consuming.

Broaden your view: The Direct Method of Reporting Operating Cash Flows

The indirect method is a way to account for financial transactions that's a bit more complex than the direct method. It's used to prepare a company's income statement.

This method involves preparing a statement of cash flows and a balance sheet before creating the income statement. The statement of cash flows shows the inflows and outflows of cash during a specific period.

The indirect method starts with the net income from the income statement and then adjusts it for any non-cash items, such as depreciation and amortization. This is done to arrive at the net change in cash.

The balance sheet is used to determine the beginning and ending cash balances. By comparing these two amounts, you can calculate the net change in cash.

The direct and indirect methods of presenting the operating section of the statement of cash flows are two different approaches that can give the same result. However, the presentation will differ.

The direct method shows the major classes of gross cash receipts and gross cash payments. This means it breaks down the cash flows into specific categories.

Regardless of the method, the cash flows from the operating section will give the same result.

On a similar theme: Direct Method Cash Flow Statement

You can break down a cash flow statement into three main sections: Operating Activities, Investing Activities, and Financing Activities. Each section provides valuable insights into how your business generates and uses cash.

The Operating Activities section appears at the top of a cash flow statement and details ongoing business activities such as sales and manufacturing. This section shows where a company gets its cash from and how it uses that money during any given period of time.

The other two sections are Investing Activities and Financing Activities. Investing Activities include cash earned or spent from investments like purchasing equipment or investing in other companies. Financing Activities involve cash earned or spent in the course of financing your company with loans, lines of credit, or owner's equity.

Here's a quick rundown of the three sections:

Depreciation and Amortization (D&A) is a crucial concept in accounting that affects a company's cash flow statement. It's a non-cash expense that reduces net income, but we need to add it back in to get a more accurate picture of the company's cash flow.

Depreciation involves tangible assets like buildings, machinery, and equipment, while amortization involves intangible assets like patents, copyrights, goodwill, and software. This distinction is important, as it affects how we account for these expenses.

Expand your knowledge: Depreciation in a Cash Flow Statement

The value of assets declines over time as they are used in a business. This is why we need to allocate the cost of an asset over its useful life, which is what D&A does.

Here's a breakdown of how D&A is used in the cash flow statement:

Note that D&A is added back into the cash flow statement to adjust net income, as it's a non-cash expense. This means that no cash transactions are involved in D&A, making it a key adjustment to get a more accurate picture of a company's cash flow.

The operating section of a cash flow statement is where the magic happens. It's where you see the cash inflows and outflows from your regular business activities. Operating activities are the principal revenue-producing activities of the entity, and they typically include cash flows associated with sales, purchases, and other expenses.

The CFO has two options when presenting operating cash flow: direct or indirect. The direct method lists cash flows as a simple list, but the indirect method is more common and used in our example. The indirect method presents operating cash flows as a reconciliation from profit to cash flow.

Curious to learn more? Check out: Cash Flow Statement Indirect Method Solved Examples

The operating section is designed to show where a company gets its cash from and how it uses that money during any given period of time. This section is crucial in understanding a company's financial health.

Here are some key items to look out for in the operating section:

The operating section is not just about actual cash flows; it also includes non-cash items and other adjustments to reconcile profit with cash flow. This is why it's essential to understand the indirect method of presenting operating cash flow.

The Financing section of the cash flow statement reveals how a company's financing activities impact its cash position.

In the example, we see that the company paid out $10,564 for dividends and dividend equivalent rights, and also repurchased $22,860 worth of common stock.

These payments led to a total of $33,424 being subtracted from the company's cash reserves.

However, the company also generated $16,896 from the issuance of long-term debt, and had some other miscellaneous income of $149.

Worth a look: Net Cash Flow from Financing Activities

This brings the net cash used in financing activities to $16,379.

The company's cash and cash equivalents actually increased by $3,513 at the end of the year, indicating that the company's overall cash flow was positive despite the negative financing activities.

Here's a breakdown of the financing activities:

A cash flow statement is a crucial tool for understanding a company's liquidity and financial agility. It details how cash is generated from everyday operations, reinvested back into the business, and allocated in financing efforts.

To effectively use a cash flow statement, you need to answer vital business questions such as: Is the company generating enough cash from its core operations to sustain itself? Are the capital investments proportionate to the available cash? Is the financial strategy effective over the long term?

By learning how to create and analyze a cash flow statement, you can make better, more informed decisions about your business.

For your interest: Cash Flow Statement Sample for Small Business

Using a template can save you time and energy, especially if you're already doing your own bookkeeping with spreadsheets. Our Free Cash Flow Statement Template is easy to download and simple to use.

To complete a cash flow forecast template, you'll need to enter only the costs relevant to your business. This includes receipts from all revenue-producing activities, which should be based on accurate figures from the past and take into consideration seasonality.

Direct costs are costs that can be directly tied to the production of specific goods or services. Overheads, on the other hand, are all fixed or variable expenses required for the operation of a business.

You can find the total cash payments by subtracting costs from receipts/revenue, or by using the template to calculate it for you. The net cash flow is simply the net amount of cash flowing in and out of your business.

Here's a breakdown of the template entries:

Remember to check your bank balance at the beginning and end of each period to get the correct opening and closing bank balance numbers.

For your interest: Balance Sheet and Cash Flow Statement

A cash flow statement is a powerful tool for evaluating a company's liquidity and financial agility. It shows how a company manages its cash, detailing how it's generated from everyday operations, reinvested back into the business, and allocated in financing efforts.

The cash flow statement is crucial for answering vital business questions, such as whether a company is generating enough cash from its core operations to sustain itself. Are the capital investments proportionate to the available cash? Is the financial strategy effective over the long term?

By learning how to create and analyze cash flow statements, you can make better, more informed decisions, regardless of your position. This is because a cash flow statement provides a unique perspective on financial health, tracking the actual cash inflows and outflows during the entire reporting period.

To create a cash flow statement, you'll need to enter the following information: receipts, direct costs, overheads, total cash payments, net cash flow, opening bank balance, and closing bank balance. This information can be found in the cash flow forecast template.

For another approach, see: What Financial Ratios Are Important to Cash Flow Statement

Here's a breakdown of what each of these entries means:

By understanding how to create and analyze a cash flow statement, you can unlock critical insights into your organization's performance and potential. This can help you make better, more informed decisions, and gain the confidence to clearly communicate them to key stakeholders.