How to Prepare Cash Flow Statements
Cash flow statements are an essential financial document that provides valuable insights into a company’s liquidity and financial health. It outlines the cash inflows and outflows during a specific period, helping stakeholders understand how the company generates and uses cash. Preparing a cash flow statement can be a complex task, but with a clear understanding of the process, it becomes manageable. In this article, we will guide you through the steps of how to prepare cash flow statements.
1. Understand the Purpose of a Cash Flow Statement
Before diving into the preparation process, it is crucial to understand the purpose of a cash flow statement. This financial statement is divided into three main sections: operating activities, investing activities, and financing activities. Each section provides information on how cash is generated and used within the company.
2. Gather Financial Data
To prepare a cash flow statement, you will need access to various financial data. These include:
– Income statement: This document shows the company’s revenues, expenses, and net income.
– Balance sheet: This statement provides information about the company’s assets, liabilities, and equity.
– Cash balance: The opening and closing cash balance for the period.
Ensure you have accurate and up-to-date financial data before proceeding.
3. Prepare the Operating Activities Section
The operating activities section shows how cash is generated from the company’s core business operations. Follow these steps to prepare this section:
– Start with the net income from the income statement.
– Adjust for non-cash expenses and revenues, such as depreciation and amortization.
– Add back non-cash expenses to arrive at the operating cash flow.
– Subtract operating expenses and taxes to determine the net cash provided by operating activities.
4. Prepare the Investing Activities Section
The investing activities section details the cash flows related to the acquisition and disposal of long-term assets. Here’s how to prepare this section:
– Record cash inflows from the sale of assets, such as property, plant, and equipment.
– Record cash outflows for the purchase of new assets.
– Include cash flows from investments, such as the purchase or sale of securities.
5. Prepare the Financing Activities Section
The financing activities section focuses on cash flows related to the company’s capital structure. Follow these steps to prepare this section:
– Record cash inflows from loans and issuance of stock.
– Record cash outflows for the repayment of loans and payment of dividends.
– Include any other financing activities, such as the purchase or sale of treasury stock.
6. Calculate the Net Increase or Decrease in Cash
To complete the cash flow statement, calculate the net increase or decrease in cash by summing up the cash flows from operating, investing, and financing activities. This figure should match the change in the cash balance reported on the balance sheet.
7. Review and Present the Cash Flow Statement
Once you have prepared the cash flow statement, review it for accuracy and completeness. Ensure that all relevant cash flows have been included and that the figures align with the company’s financial records. Finally, present the cash flow statement in a clear and concise format for stakeholders to review.
In conclusion, preparing a cash flow statement requires a thorough understanding of the company’s financial activities and the proper application of accounting principles. By following these steps, you can ensure that your cash flow statement accurately reflects the company’s cash position and provides valuable insights into its financial health.
