Statements of cash flows are one of the most important reports you can run to determine just how well your business is performing. At the end of each accounting period, a statement of cash flows should be prepared to provide you with an accurate picture of your company’s health.
Adjusting the Income Statement
Income statements include both future and present cash flow. In order to have the most accurate report, you must first separate your cash on hand from your possible cash accrual to determine your starting cash balance for the accounting period.
Determining the Starting Balance
This step includes the addition of both the amount of cash on hand plus cash equivalents. Cash equivalents are the current cash valued amount of assets such as savings, stocks, and certificates of deposit. This cash amount will be the ending balance of your statement of cash flows. This area of the cash flows statement should be labeled, "Current Assets."
Cash from Operations
Next, you must determine how much net income your company earned from operations for the accounting period. To calculate cash from operations, first add back the depreciation expenses. If left subtracted, these could set off the net income. Then subtract the accounts receivable, since it is money that is not yet collected. If the accounts payable is negative, this number should be added. Accounts payable amounts should also be added since it reflects what you have not yet paid out to creditors and debts. This section should be labeled as, "Cash Flow from Operations."
Company Asset Investments
If your company made any investment purchases such as machinery, computer equipment, supplies, or has invested in another company, the cost of these assets must be added together to adjust the statement of cash flows. This is called "Cash Flow from Investing Activities." To find out exactly how much cash was put out for investment assets, simply add the cost off all of these assets together. The amount will generally be a negative number since it represents cash out.
Cash from Financing
The last heading on your statement of cash flows should be, "Cash Flow from Financing." This part of the report should be the sum of all the companys stock and bond debt. In order to determine the affect of your cash financing, you must subtract the debt paid-out against long-term debts and cash dividends paid out to company stockholders.
The Completed Statement of Cash Flows
Now that you have separated your company’s cash, its time to compile the information to build your statement of cash flows. Start off with your cash flow balance, under that cash from operations, next cash from investments, and then the ending balance.
This section of your statement of cash flows is purely optional. If there were any major non-cash transactions such as a stock/bond swap, this area should include the taxes paid and interest lost/gained from the transaction.
This statement of cash flows is a relatively simple tool to help you find out the true health of your company finances. Whether times are tough or prosperous, your statement of cash flows is a no-nonsense way to help you determine the current status of your business and can also help you make informed projections about future earnings/losses.
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