Reporting Cash Flows

At this point in my Accounting 201 class, we are preparing for the end of the semester...which means finals. Since this is an introductory level course, we are only covering certain topics that will be covered in later classes, including Finance and higher level accounting classes. Therefore, our final topics will be cash flow statements and how to analyze other financial statements.

For the subject of this blog post, I will discuss the importance and how to go about producing a report of cash flows. The statement of cash flows reports cash receipts and payments involved in operating, investing, and financing activities. These statements are especially important to a business that is monitoring and analyzing change throughout a business period or deciding whether or not to make a decision.  It will help answer the following questions:

What explains the change in the cash balance?
Where does a company spend its cash?                                 
Why do income and cash flows differ?
How much is paid in dividends?
How does a company receive/disperse its cash?
Is there a cash shortage/surplus?
(Questions derived from "Financial and Managerial Accounting: Information for Decisions" by John J. Wild)

The statement of cash flows, as mentioned, are broken into three categories, if you will: Operating, Investing, and Financing.

Operating Activities
Operating activities include transactions that ultimately determine net income. Examples include the production/purchase of inventory, sale of goods and services, and other operating expenditures. When producing this section, the accountant must also consider depreciation expense, loss/gain, current assets, and current liabilities. The majority of these factors can be found in the balance sheet and income statement. The prepared operating statement will be produced as follows:

Net Income (+) or (-)
Depreciation Expense (+)
Loss (+) or Gain (-)
Current Assets Increase (-) or Decrease (+)
Current Liabilities Increase (+) or Decrease (-)
Cash flows from operations..............................net of the above


Investing Activities
Investing activities include transactions that affect long-term assets. Specifically, these activities will be the purchase and sale of short-term investments as well as the lending and collecting of money for notes receivable. In the report, one will generally find the purchase and sale of equipment. This section will be prepared as follows:

Purchase of equipment (-)
Sale of equipment (+)
Cash flows from investing..................net of the above


Financing Activities
The financing activities include transactions that affect long-term liabilities and equity. When a company obtains cash from issuing debt and repays borrowed amounts or receives cash from or disperses cash amongst owners. This section will be prepared as followed:

Issuance of Stocks (+)
Cash Paid to Settle Notes Payable (-)
Cash Paid to Retire Bonds Payable (-)
Dividends Paid (-)
Cash flows from financing..................net of the above


As you can see, the preparation of a statement of cash flows is vital to the success of a business.






There are now only 28 days till Christmas!!!