How to Craft a Cash Flow Statement from Your Trial Balance- A Step-by-Step Guide

How to Prepare Cash Flow Statement from Trial Balance

Preparing a cash flow statement from a trial balance is an essential task for financial analysts and accountants. The cash flow statement provides a detailed overview of the cash inflows and outflows of a business during a specific period. It helps in understanding the liquidity position of the company and its ability to generate cash. In this article, we will discuss the step-by-step process of preparing a cash flow statement from a trial balance.

Step 1: Understand the Purpose of the Cash Flow Statement

Before diving into the preparation process, it is crucial to understand the purpose of the cash flow statement. The cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities. Each section represents the cash inflows and outflows related to different aspects of the business.

Step 2: Gather the Trial Balance

The first step in preparing the cash flow statement is to gather the trial balance. The trial balance is a summary of all the accounts in the general ledger, showing their balances at a specific point in time. It should include all the assets, liabilities, equity, revenue, and expense accounts.

Step 3: Identify the Cash-Bearing Accounts

Next, identify the cash-bearing accounts from the trial balance. These accounts include cash, cash equivalents, and any other accounts that directly affect the cash balance. It is essential to ensure that all cash transactions are recorded in these accounts.

Step 4: Classify Transactions into Operating, Investing, and Financing Activities

Once you have identified the cash-bearing accounts, classify the transactions into operating, investing, and financing activities. Operating activities include cash flows from the company’s core business operations, such as sales and expenses. Investing activities include cash flows from buying or selling long-term assets, such as property, plant, and equipment. Financing activities include cash flows from borrowing or repaying loans, issuing or buying back shares, and paying dividends.

Step 5: Calculate Net Cash Flow from Operating Activities

To calculate the net cash flow from operating activities, start with the net income from the income statement. Adjust the net income for non-cash expenses and revenues, such as depreciation, amortization, and gains or losses on the sale of assets. Add back non-cash expenses and subtract non-cash revenues to arrive at the net cash flow from operating activities.

Step 6: Calculate Net Cash Flow from Investing Activities

For the net cash flow from investing activities, consider the cash inflows and outflows related to the purchase or sale of long-term assets. This includes the purchase or sale of property, plant, and equipment, as well as investments in other companies. Sum up the cash inflows and subtract the cash outflows to determine the net cash flow from investing activities.

Step 7: Calculate Net Cash Flow from Financing Activities

The net cash flow from financing activities involves cash inflows and outflows related to the company’s capital structure. This includes cash received from issuing debt or equity, as well as cash paid for repaying debt, buying back shares, or paying dividends. Sum up the cash inflows and subtract the cash outflows to determine the net cash flow from financing activities.

Step 8: Calculate the Net Increase (Decrease) in Cash and Cash Equivalents

Finally, calculate the net increase (decrease) in cash and cash equivalents by adding the net cash flows from operating, investing, and financing activities. This figure represents the change in the company’s cash balance during the period.

Step 9: Prepare the Cash Flow Statement

Using the information gathered from the trial balance and the calculations performed in the previous steps, prepare the cash flow statement. Organize the cash flows into the operating, investing, and financing activities sections, and present the net increase (decrease) in cash and cash equivalents at the end.

By following these steps, you can successfully prepare a cash flow statement from a trial balance. This statement will provide valuable insights into the cash position and liquidity of the company, helping you make informed financial decisions.