Statement of Cash Flows
A Statement of Cash Flows is one of the major financial statements that businesses use. It provides a detailed account of the cash inflows and outflows a company has experienced over a specific period, such as a quarter or a year. The primary objective of this statement is to provide information about a company’s cash receipts, cash payments, and net changes in cash resulting from operating, investing, and financing activities.
The Statement of Cash Flows is divided into three main sections:
- Operating Activities: This section focuses on the cash flows from the core operations of the business—essentially the activities that determine the net income of the business. It includes receipts from sales of goods and services, payments to suppliers and employees, interest payments, and tax payments.
- Investing Activities: This section details the cash flows associated with acquiring and disposing of long-term assets. This could include cash paid to purchase property, plant, and equipment, cash received from selling such assets, or cash flows from buying or selling investments like stocks and bonds (not including trading securities).
- Financing Activities: This section captures the cash flows between the company and its owners and creditors. It includes borrowing from lenders, repayments of borrowed amounts, issuing or repurchasing the company’s own stock, and receiving or paying dividends.
The net change in cash from all these activities is added to or subtracted from the beginning cash balance to calculate the ending cash balance for the period. This ending cash balance should tie to the cash amount reported on the company’s balance sheet for that period.
Example of a Statement of Cash Flows
Let’s delve deeper into a fictional example of a Statement of Cash Flows for a company named “GreenTech Enterprises” for the year ended December 31, 2023:
GreenTech Enterprises
Statement of Cash Flows
For the Year Ended December 31, 2023
Cash Flows from Operating Activities:
Net Income: $200,000
Adjustments to reconcile net income to net cash provided by operating activities:
- Depreciation: $40,000
- Changes in operating assets and liabilities:
- Increase in Accounts Receivable: ($15,000)
- Decrease in Inventory: $10,000
- Increase in Accounts Payable: $5,000
- Decrease in Prepaid Expenses: $5,000
- Increase in Accrued Liabilities: $5,000
Net Cash Provided by Operating Activities: $250,000
Cash Flows from Investing Activities:
- Purchase of Property and Equipment: ($70,000)
- Proceeds from Sale of Land: $20,000
Net Cash Used in Investing Activities: ($50,000)
Cash Flows from Financing Activities:
- Proceeds from Issuance of Bonds Payable: $50,000
- Dividends Paid: ($30,000)
- Repurchase of Common Stock: ($10,000)
Net Cash Provided by (Used in) Financing Activities: $10,000
Net Increase in Cash: $210,000 (Total from Operating, Investing, and Financing Activities)
Cash at Beginning of Year: $40,000
Cash at End of Year: $250,000
From the above Statement of Cash Flows for GreenTech Enterprises:
- Operating Activities: The company generated a net cash inflow of $250,000 from its primary operations. This was mainly driven by the net income of $200,000, with adjustments for non-cash items like depreciation and changes in working capital.
- Investing Activities: There was a net cash outflow of $50,000. While the company spent $70,000 on new property and equipment, they also managed to receive $20,000 from the sale of land.
- Financing Activities: The cash flow here was a net inflow of $10,000. The company raised $50,000 from issuing bonds, but they also paid dividends ($30,000) and repurchased some of their stock ($10,000).
The result of these cash flows left GreenTech Enterprises with a cash balance of $250,000 at the end of the year, which is an increase of $210,000 from the beginning of the year.
This Statement of Cash Flows provides stakeholders a clear view of where the company’s cash came from and how it was used over the year.
