A statement of cash flows is one of the major financial statements prepared by corporations at the end of each accounting period.The goal of the cash flow statement is to show an accurate picture of cash inflow and cash outs during the accounting period.Net changes to cash from operations, investing, and financing activities are calculated in the statement.When calculating the ending cash and cash equivalents for the current year, the total increase or decrease in cash from the prior year is added.Keep in mind that the ending cash amount on the statement of cash flows should be the same as the end of the balance sheet.An error has been made if the amounts are not equal.
Step 1: The cash balance from the prior year is determined.
You can find this information if the company prepared a statement of cash flows.The ending cash balance and the prior year's ending balance sheet are required.Cash and cash equivalents can be converted into cash within a year.Money market funds, certificates of deposit and savings accounts are cash equivalents.
Step 2: All of the cash and cash equivalents are added together.
The value of the cash and cash equivalents can be found on the balance sheet.The company had $800,000 in cash at the end of the previous year.Money market funds and CDs were worth $2,500,000 and $1,500,000, respectively.There were savings accounts worth $1,200,000.The ending cash balance for the prior year is determined by adding all of these amounts together.The prior year ending balance is $6,000,000.
Step 3: For the current year, establish the beginning cash balance.
The beginning balance for the current year is the ending balance from the prior year.The previous year's ending balance was $6,000,000.For the current year, use this as the beginning balance.The current year's beginning balance of cash and cash equivalents is $6,000,000.
Step 4: Net income is the first thing to start with.
Net income is the difference between total revenues and operating expenses.The company has a profit for the year.After expenses have been paid, it includes all of the money left over.The company has an income statement.The company had a net income of $8,000,000.
Step 5: Take depreciation and amortization into account.
Non-cash expenses such as depreciation and amortization record the decrease in value of assets over time.They are calculated using the original value and useful life of the asset.Since these expenses do not require an expenditure or receipt of cash, the amounts must be added back to the cash balances.The company reported $4,000,000 in depreciation and amortization expenses.$4,000,000 would be added back to the cash balance.
Step 6: There are adjustments for accounts payable and accounts receivable.
The company owes money to its creditor.Money owed to the company is called accounts receivable.For the income statement, accruals for accounts payable and accounts receivable are entered for the time period in which they occurred, whether or not cash has actually been paid or received.The accruals must be adjusted for the statement of cash flows because they are non-cash transactions.Check the balance sheet for accrued liability accounts.These are expenses that will happen in the future, but they are not cash expenses right now.You will need to adjust for these on the statement of cash flows.If you have any Prepaid Assets on the balance sheet, these are expenses that have already been paid but have not been incurred.You don't need to change them.The beginning balance of the current year is the accounts receivable balance from the prior year.Imagine that the beginning balance was $6 million.The accounts receivable balance increased by $2 million during the year.Accounts receivable is income that hasn't been deposited into cash.The company has used cash during the year to finance its sales and needs to take the increase from the cash balance.A decrease in AR means that customers have paid down their debts and need to add the decrease back to their cash balance.Net change to accounts receivable was $2,000,000 for the company in the above example.The customers have not paid the money.This must be subtracted.The change to accounts was a million dollars.The company owes money but hasn't paid it.This must be added.
Step 7: The net cash generated from operations is calculated.
Start with net income.Add back depreciation and amortization expense.Accounts receivable and accounts payable reverse accruals.$11 million is the net cash generated from operations.The operating activities provide a net cash flow of $11,000,000.
Step 8: Take a look at investments in capital.
Capital investments are the funds the company uses to buy equipment that can produce goods or services.One asset is exchanged for another asset when a company buys equipment.Cash is used for the purchase of the equipment.An exchange of one asset for another is what would happen if a company sold capital equipment.The cash outflow must be included in the statement of cash flows if a company purchases capital equipment with cash.
Step 9: The impact of financing activities is determined.
Financing activities include issuing and redemption of debt, retirement of stock and payment of dividends.Cash flow can be affected by these activities.Debt and stock increase the company's cash.Paying stock dividends decreases cash.
Step 10: There are adjustments for investments and financing.
Paying cash for capital equipment is deductible.Cash can be used to redeem debt or pay dividends.Cash can be raised by issuing stock or debt.For a total of $4,000,000, the company purchased new computer equipment and assembly line machinery.This must be subtracted.They increased short term debt by half a million dollars.These must be added.They paid $2,000,000 in dividends and redeemed $3,000,000 of long-term debt.These must be subtracted.$8.25 million is the reduction in cash during the period from equipment purchases for cash to redemption of long-term debt.The adjusted cash for investing and financing activities is $8,250,000.
Step 11: The net increase or decrease should be determined.
If there was a net increase or decrease to cash for the current year, this means figuring it out.Start with the total cash flows from operating activities.There are adjustments to cash flows for investment and financing activities.The result is the net increase or decrease to cash for the year.Net cash flow from operating activities was $11,000,000.The change to cash from investing and financing activities was $8,250,000.The net increase or decrease to cash is $11,000,000.
Step 12: The end cash and cash equivalents should be calculated.
Start with the cash balance from the previous year.Cash from the current year can be added to the net increase or decrease.The result is the total ending cash and cash equivalents.The company had a cash balance of $6,000,000 at the end of the previous year.The increase or decrease to cash was $2,750,000.The current year's ending cash and cash equivalents are $6,000,000+$2,750,000.
Step 13: Evaluate the company's financial health with the cash flow statement.
The accounting methods that are removed from the cash flow statement are accruals, depreciation and amortization.It shows how cash is flowing in and out of the company.This allows investors to see a picture of the company's earning power.A net increase in cash usually means that the company is running its operations efficiently.Problems with the company's operating, investing or financing activities might be indicated by a net decrease in cash.In order to improve its financial health, the company needs to decrease expenses.Cash flow analysis is only a small part of a company's financial health.A major investment in the company's future growth is concurrent with a net decrease in cash.A net increase in cash shows that management is lazy about investing in the company.