Of the three main financial statements, the statement of cash flow is probably the most under reported. Yet it is an important report that shows the company’s ability to generate cash. This article looks at how to create a cash flow statement using the indirect method and its importance to the financial stability of the company.
The Importance of Accounting for Cash Flow
Although the income statement may show a net profit every month, it doesn’t have much meaning when it comes to generating ready money. The majority of business is conducted on open credit terms or accounts receivables. The revenue from those sales is reported as income, yet the actual cash is received at a future date.
Remember that accounting for cash flow system is absolutely opposite to home loans ballina that is usually required for starting up a new business or other purpose. In this article our focus is to elaborate accounting cash flow with examples.
Purchasing inventory is another example. Inventory is purchased and cash is dispersed; yet inventory is not reported on the income statement. These are just a few examples of inconsistencies between profit and cash flow. Besides these two examples, there are many other considerations that must be analyzed in order to measure the company’s ability to generate ready money.
Creating the Statement of Cash Flow
The balance sheet and income statement are both used to calculate cash flow. These two financial statements together hold the key for the company’s ability to generate ready money. When creating the cash flow statement, there are three basic categories that must be considered, they are
The daily business activities that help create revenue and affect cash flow are listed under operations. Investments would normally create a decrease in cash for the purchase of fixed assets like equipment or furniture. Financing would include interest paid or interest income generated. Expenses are not included because they are reported on the income statement and deducted from revenue.
Accounting Cash Flow Statement Sample – Indirect Method
All financial statement reporting is done from one accounting period to another. The statement of cash flow, balance sheet and income must all be from the same accounting methed. The statement normally starts with net income from the income statement. Increases and decreases from the start of the accounting period to the end of the accounting period are taken from general ledger account totals on the balance sheet that affect cash flow.
Cash Flow Statement from Operations – Year End 2016
Net Income $300,000
Increase to Cash
- Depreciation $15,000
- Decrease in Accounts Receivable $25,000
Decrease to Cash
- Decrease in Accounts Payable $20,000
- Increase in Inventory $40,000
Net Cash from Operations $280,000
The three financial statements, balance sheet, income statement and statement of cash flows are important to get a true picture of the performance of any business. The balance sheet shows the business net worth, the income statement shows the profitability and the cash flow statement the businesses ability to generate money.