Understanding the statement of cash flows

Amanda White

What is the Statement of Cash Flows?

The statement of cash flows is a much more complicated financial statement to prepare. While the P&L contains the summary of business transactions recorded using the accrual method – we know that cash is not always exchanged in transactions. For example, you purchase items from a supplier and you’ll pay in 60 days.

However real cash is required from your customers to be able to pay your suppliers, employees and any lenders you might have. It is possible that a business may appear to have profits, but actually not have sufficient cash to pay their debts. If this is the case – the business has a Going Concern issue – they may be trading while INSOLVENT – that is, insufficient cash to meet their obligations.

In essence, the statement of cash flows shows the cash inflows and outflows in 3 main categories:

    1. Cash flow from operations (daily business)
    2. Cash flow from investing activities (such as purchasing a new machine for the factory)
    3. Cash flow from financing activities (such as inflows of cash from new shareholders or loans, paying dividends or loan repayments)

You take the opening balance of cash (the balance at the beginning of the financial period), then add/subtract the flows from the three main categories and that will give you the closing balance of cash. This closing balance should match the value of Cash that you have recorded in your Balance Sheet.

How to construct a Statement of Cash Flows

In Accounting and Accountability, we won’t be covering this as part of the introductory content as it requires some components of more advanced accounting we haven’t yet encountered. The follow on textbook, Accounting Business and Society will include this information.

For now – it is sufficient to understand what the Statement of Cash Flows is and the general construction ideas, without being able to actually create one.


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