Understanding the Statement of Cash Flows

This is the third post for the series on understanding your financial statements. We began with the balance sheet and the income statement. If you haven’t had a chance, check out the balance sheet and the income statement. This week we will discuss the statement of cash flows. Next week, I will end this series on how to analyze all three financial statements to get an understanding on how your business is doing financially. I truly hope you find this helpful in your business.

The statement of cash flows reports how cash was generated and used during a specific time period. It is categorized by the following categories: Operating activities, investing activities, and financing activities. The operating activities converts the items reporting on the income statement from the accrual basis to cash. The investing activities reports the purchase and sale of long-term investments and property, plant, and equipment. The financing activities reports the issuance and repurchase of the company’s own bonds and stock and the payment of dividends.

OPERATING ACTIVITIES

The following accounts show what cash is used to make up the operating activities.

Unearned Revenue

Accounts Receivable

Accounts Payable

Inventory

Supplies

Other Current Assets

Other Current Liabilities

Interest Payable

Notes Payable

Wages Payable

Payroll Taxes Payable

Income Taxes Payable

Prepaid Insurance

INVESTING ACTIVITIES

The following accounts show what cash is used to make up the investing activities.

Long-term Investments

Land

Buildings

Furniture

Vehicles

Equipment

FINANCING ACTIVITIES

The financing activities shows the changes in the long-term liability and stockholders’ equity accounts and the following accounts make up the financing activities.

Retained Earnings

Preferred Stock

Common Stock

Notes Payable (generally due after one year)

Bonds Payable

Deferred Income Taxes

WHAT DOES THIS MEAN TO YOUR BUSINESS

The revenues reported may not have been collected since the accrual basis of accounting records revenue at the time it is earned, not when it is received. The statement of cash flows shows the flowing in and out of cash. If your business is consistently generating more cash than you are using, you are in a great position to be able to reduce your debt, acquire more assets, or further invest in your business. It is important to remember that positive numbers on the statement of cash flows are considered good for your cash balance.

Next week we will discuss how to look at all three financial statements how this can determine your business’ financial health.