In our last post, we talked about the basics of cash flow statements, what they are and what they can tell us. This time, we’re going to get a little more in-depth, and look at the anatomy of a cash flow statement, the way that it’s broken down, and what each section amounts to.
The cash flow statement reports the cash generated and used during a specific period. You can set what period your cash flow statement covers yourself, though they’re often generated monthly, quarterly or for the entire fiscal year. The information of what period the cash flow statement covers will usually be in the heading, and should be kept consistent for the best record keeping. If you start generating cash flow statements for many different periods, it can quickly become confusing to compare them to one another, and they lose some of their utility.
Most businesses use the indirect method of generating their cash flow statements, in which the starting point is the accrual based net income reported on the income statement. From here, the changes in your balance sheet accounts over the period provide much of the information that’s used to generate the cash flow statement.
Once generated, the statement is broken up into three main categories:
- Operating activities – The operating activities category converts the information from your income statement from an accrual basis to cash. To do this, it compares information from the balances of current asset and current liability accounts, including such sub-categories as accounts receivable, accounts payable, wages payable, inventory, supplies, notes payable, interest payable, taxes, and other accounts. The operating activities category also covers things like depreciation and gains and losses from long-term assets.
- Investing activities – The investing activities category concerns itself with the purchase and sale of long-term investments, including property, buildings, equipment, furniture and fixtures, and vehicles.
- Financing activities – The financing activities concerns the cash activities related to long term liabilities and owners’ equity. This could include the payment of dividends as well as issuing and repurchasing the company’s own stock and bonds. It draws its information from changes in the balances of long-term liability and stockholder’s equity accounts.
This should provide you with a broad overview of the anatomy of a cash flow statement. Though many small business owners dread them, they’re an important part of bookkeeping and they’re not so intimidating once you begin to understand them. Still, we know that many small business owners have to dedicate their time and energies toward running their business and may not have enough of either left over to engage in the kinds of best accounting practices that will help them be successful. That’s why we here at Financial Optics are ready to take the burden of Cash flow statements and all your other accounting needs off your desk, so that you can focus on the business of running your business.
Financial Optics serves business owners and entrepreneurs with remote web and cloud-based finance applications. Let our professional accountants run your daily, weekly, or monthly bookkeeping and accounting, so you can run your business. Contact us by phone at (913) 649-1040 or click here to visit our Contact page.