Mastering the Art of Preparing a Comprehensive Statement of Cash Flow

How to Prepare a Statement of Cash Flow

Preparing a statement of cash flow is a crucial task for any business, as it provides a detailed overview of the cash inflows and outflows over a specific period. This financial statement is essential for assessing the liquidity and financial health of a company. In this article, we will discuss the steps involved in preparing a statement of cash flow, ensuring that you have a clear understanding of the process.

1. Understand the Purpose of the Statement

Before diving into the preparation process, it is essential to understand the purpose of the statement of cash flow. This financial statement is divided into three main sections: operating activities, investing activities, and financing activities. The purpose of each section is as follows:

– Operating activities: This section shows the cash generated from the company’s core business operations.
– Investing activities: This section details the cash used for purchasing or selling long-term assets, such as property, plant, and equipment.
– Financing activities: This section reveals the cash used for financing the company, such as issuing or repurchasing shares, taking out loans, or paying dividends.

2. Gather the Necessary Information

To prepare a statement of cash flow, you will need the following information:

– Balance sheets from the beginning and end of the period.
– Income statements for the same period.
– Additional notes and disclosures related to the company’s financial transactions.

Ensure that you have all the necessary documents to accurately reflect the cash flows during the period.

3. Calculate Net Cash Flow from Operating Activities

This section involves adjusting the net income from the income statement to arrive at the net cash flow from operating activities. Follow these steps:

– Start with the net income from the income statement.
– Add back non-cash expenses, such as depreciation and amortization.
– Subtract non-cash revenues, such as gains on the sale of assets.
– Adjust for changes in working capital, such as accounts receivable, accounts payable, and inventory.

4. Calculate Net Cash Flow from Investing Activities

In this section, you will need to identify the cash flows related to the purchase and sale of long-term assets. Here’s how to do it:

– Add the cash received from the sale of assets.
– Subtract the cash paid for the purchase of assets.
– Include cash flows related to investments, such as the purchase or sale of securities.

5. Calculate Net Cash Flow from Financing Activities

This section involves analyzing the cash flows related to the company’s financing activities. Follow these steps:

– Add the cash received from issuing debt or equity.
– Subtract the cash paid for dividends and share repurchases.
– Include cash flows related to loans, such as the repayment of principal and interest.

6. Calculate the Net Increase or Decrease in Cash

To calculate the net increase or decrease in cash, sum up the net cash flows from operating, investing, and financing activities. This figure will be reflected in the balance sheet.

7. Prepare the Statement of Cash Flow

Finally, organize the information into the statement of cash flow format. The statement should include the opening and closing cash balance, as well as the net increase or decrease in cash.

By following these steps, you can prepare a comprehensive statement of cash flow that accurately reflects the cash flows of your business. This financial statement will help you make informed decisions about your company’s liquidity and financial health.