Statement of Cash Flows

Video Transcription

Hey, everyone, and welcome to today's video-- Statement of Cash Flows. So what are we covering, today? Well, today is going to be all about the statement of cash flows. We're going to look at what it is, the structure, and how it's used. And then, we're going to finish up with an example of preparing the statement of cash flows.

So the statement of cash flows. Let's take a step back and look at what are financial statements. They're reports providing financial information about a business, at a given time. So then, what is the statement of cash flows? It's a financial statement that reports cash receipts and cash payments, for a specific period. So it covers cash receipts and cash payments. That's what it focuses on.

Now, what does that tell us? That tells us information about the business and cash. It generally covers one year or less, similar to our income statement, and it tells us how the business used cash-- so the cash payments that we made-- as well as how the business generated cash-- so where did we get our cash from? So our cash receipts.

The statement of cash flows can be thought of as a modified income statement. So, if we were to prepare our income statement, on the cash basis, the amounts would look very similar to what's in the statement of cash flows. So that's a statement of cash flows.

Let's look at what goes into creating a statement of cash flows. The statement of cash flows is categorized by type of activity. And cash performance is outlined in three main business areas. Those are operating. So our operating-- our activities found on the income statement. So we have an operating section, for activities found on the income statement.

Then the investing. That's the sale or purchase of long-term assets, loaning money, and collecting principal of monies loaned. And the last area is financing activities. That's cash from financing and cash paid to owners.

So where do we get our information to create the statement of cash flows? Well, we get information from the balance sheet. We would need both the current-year balance sheet, as well as last year's balance sheet. We also get information from our income statement. And then we're going to look at transaction-specific information for our specific cash transactions.

So now let's look at the statement of cash flows formula. So we start with net income; adjustments for non-cash expenses. We would add those, and then we would subtract out adjustments for non-cash revenues, to give us our cash flow from operating activity.

Then we would add or subtract the investing activities that went on, during the period. And that's going to give us our cash flow from investing activities. And then, we're going to look at additions or subtractions-- so cash payments or cash received for financing activities. And that's going to be our cash flow from financing activities.

So if we add all three of these, together-- the cash flow from operating, cash flow from investing, and cash flow from financing-- we would get the net change in cash, over the period. We would then add our beginning cash balance, to give us our ending cash balance, for the period. So we're going to see all the cash that was used or provided, in all of these operating areas. And then we're going to get down to our ending cash balance. And now that ending cash balance should equal the cash on our balance sheet. So those should be equal. OK?

So now what we're going to do is, we're going to prepare an example cash flow statement. So we're going to look at walking through, preparing our statement of cash flows, in those three main areas. OK.

So what we have, here, is our statement of cash flows. And now the starting point for our statement of cash flows is going to be our header. So we need to put company name, "Statement of Cash Flows," and then, because the statement of cash flows is period-based, we need to put "For the Period Ending"-- blank. And now, in this case, for our example, it's going to be December 31, 2012.

Now the first section of the statement of cash flows is cash flows from operating activities. To calculate that, we start with our net income, and we make what we call "adjustments to reconcile net income to cash provided by operating activities." What that means is that we're going to adjust our net income for any non-cash items, so that we can pull just the cash-flow piece out of our net income, to calculate net cash provided by operating activities.

OK. So we're going to start with our net income. And then, in this section-- cash flows from operating activities-- we need to take out all these items. So some examples would be, depreciation expense. Since that's a non-cash item, and it was deducted, to get to our net income, we would need to add it back, on our statement of cash flows.

And now our changes in current assets. In this section-- current assets-- the adjustments are made inversely to what is indicated there. So an increase in current assets means we would have to deduct that amount out, whereas a decrease in current assets means we would add that amount back, in this operating-activities section.

And, for our current liabilities, they move directly. OK? So that means that, if there's an increase in a current-liability item, we would add it back, here, as well as any decrease in a current-liability item would be subtracted. So changes in current assets; those would be inverse adjustments. And then changes in current liabilities would be direct adjustments. So they move in the same direction.

So we have our total, here, of all of our net income adjusting items. So we add those to our net income to get to net cash provided by operating activities.

The next section of the statement of cash flows is cash flows from investing activities. And that's all transactions involving sale or purchase of long-term assets, loaning money, and collecting principal amounts of monies loaned. So, in this example, we have a purchase of equipment and a loan made to ABC Company. So those are both going to be outflows. So, since we purchased equipment, we had to spend cash, so we have to subtract that, here.

And same with a loan made to a company. So we gave another company money, in exchange for agreeing to this loan. So we gave them cash. So that means we had net cash used. So, before, we had net cash provided-- because it was a positive cash-- now, we have net cash used by investing activities. So it was a $75,000 outflow.

And then the next section is cash flows from financing activities. So that's all of our cash received from financing to fund operations, as well as paid to owners in drawings. So if we drop in that information, in our example-- so we'd received money from a loan; that's an inflow of cash. And the owners pulled $30,000 out of the business. So that's an outflow of cash. So the net cash provided by financing activities was $170,000.

So then we total together our cash flow provided by operating activities, cash flow used by investing activities, as well as net cash provided by financing activities, to get to the net increase in cash. If we, then, add the beginning balance in cash, you'll see that our ending cash balance, in this case, should be $435,000, and that should agree to our balance sheet.

Great. So, now that we've seen how to prepare a statement of cash flows, let's summarize what we talked about, today. In a nutshell, today was all about the statement of cash flows, which is the financial statement that reports cash receipts and cash payments, for a specific period. Those items are reported within operating activities, investing activities, and financing activities.

I hope everybody enjoyed this video, and I hope to see you next time.