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This report tells the story of a business, where the money is coming from, and where it's going.

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Quick reference

Cash Flows

The Statement of Cash Flows is a financial report that outlines how changes in balance sheet accounts and income affect cash and cash equivalents. It breaks down the analysis over a set period (e.g., monthly, quarterly, annually). This is important because the profit and loss report and the balance sheet alone do not show the whole picture of what happened to the cash.

Key Components of the Statement of Cash Flows

Operating Activities: This section adjusts the net income for transactions that affected reported net income but didn’t involve cash. 

Examples include:

  • Changes in accounts receivable
  • Depreciation
  • Changes in inventory

Investing Activities: This part reports the purchase and sale of long-term investments like property and equipment.

Financing Activities: This section reflects the cash flow from and to shareholders and lenders.

Examples include:

  • Dividends paid
  • Repayment of debt (loans)

Methods of Reporting

Direct Method: Presents the specific cash flows associated with items that affect cash flow. Items that typically do so include cash receipts from customers, cash paid to suppliers, cash paid for wages, etc.

Indirect Method: Adjusts net income for the changes in balance sheet accounts to calculate the cash from operating activities. The indirect method is more often used and is considered less labor-intensive

Benefits of the Statement of Cash Flows

  • Provides insight into a company's liquidity and financial flexibility
  • Helps stakeholders determine whether a company can cover its expenses
  • Indicates if a company is accumulating assets or debt
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  • 00:04 In this lesson, I'm going to review the statement of cash flows and
  • 00:08 why the statement of cash flows is important.
  • 00:11 Let me briefly explain what the statement of cash flows is.
  • 00:16 The statement of cash flows is a report that describes
  • 00:19 what happened to the business's money over a specified period.
  • 00:23 So maybe it's from the beginning to end of last month.
  • 00:26 Maybe it's the beginning of the year to the end of last month.
  • 00:30 Whatever the case is,
  • 00:31 this report's going to explain what happened to the money.
  • 00:35 The report is going to cover the income as well as the payments towards loans,
  • 00:40 as well as investments from the owner.
  • 00:43 It's all of the things that relate to the money.
  • 00:48 There's an indirect method and a direct method.
  • 00:51 I'm going to use the indirect method.
  • 00:54 The indirect method starts with cash from operating activities,
  • 00:58 think income from the business, cash from investing activities, think,
  • 01:03 owner investing money in the business.
  • 01:05 Cash from financing such as taking out a loan, the cash increase or
  • 01:10 decrease, and then the cash at the end of the period.
  • 01:15 I really think the best way to understand this is to take a look at it in the sample
  • 01:19 company.
  • 01:22 Let's take a look at the statement of cash flows using QuickBooks online sample file.
  • 01:27 This is for the period January through November.
  • 01:31 The statement of cash flows begins with the net income, and
  • 01:34 then it has adjustments to net income.
  • 01:37 There are adjustments for the accounts receivable balance, the inventory balance,
  • 01:42 the accounts payable, the Mastercard, board of equalization, and loan payable.
  • 01:49 These adjustments when added together total to be $253.
  • 01:53 When you add the net income plus the adjustments,
  • 01:57 you have net cash provided by operating activities of $1,800.
  • 02:03 But there are more things that have happened on the balance sheet.
  • 02:07 There was the purchase of a truck, there was the addition of a loan, and
  • 02:12 then there was adjustments to opening balance equity.
  • 02:16 When all these things are added together,
  • 02:19 the cash at the end of the period is $4,000.
  • 02:23 The benefit of the statement of cash flows is that it gives the person looking at
  • 02:27 the report a holistic view of what's happening with the finances for
  • 02:31 our company.
  • 02:33 It incorporates the information from the income statement as well as
  • 02:36 the information from the balance sheet.
  • 02:39 This is the report that's going to tell the viewer, is the business doing well and
  • 02:43 succeeding and having great net income?
  • 02:46 Or is the business taking on a bunch of loans and a bunch of debt and
  • 02:50 things that perhaps they should be aware of?
  • 02:54 Let's take a brief look at this using the Xero sample file.
  • 02:58 I'm going to go to Accounting and then to Reports.
  • 03:01 I'm going to scroll down to Financial Statements, and
  • 03:04 then I'm going to take a look at the Statement of Cash Flows- Direct Method.
  • 03:09 There are the sales of 23,000.
  • 03:12 There are the expenses of 37,000.
  • 03:16 There's sales tax collected, but set aside to remit of $160.
  • 03:22 Then there's proceeds from the sale of stuff, $2,500.
  • 03:26 There's $4,000 in the purchase of stuff.
  • 03:32 What this means is after recording all of the money in and all the money out,
  • 03:36 the difference is a negative 15,000.
  • 03:40 At the beginning of the period, so in January,
  • 03:44 the business had a cash and cash equivalent of $5,000.
  • 03:49 The net cash flow, everything you see up above, there's a negative $15,000.
  • 03:55 At the end of this period,
  • 03:57 there's a negative $10,000 in cash and cash equivalents.
  • 04:03 The change is $15,000.
  • 04:06 Really, it's saying the difference between what we ended at and
  • 04:10 what we started at was a negative 15,000.

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