Building a Cash Flow Statement

how to do a cash flow statement

This is the last, and final, article in our series describing cash flow concepts. In the paragraphs below, we’re going to explain how to go about building a cash flow statement. While many investors will never need to create this financial report, understanding the concepts provides a greater appreciation for its value when evaluating the financial health of a company.

Advantages of the Cash Flow Approach

It's often difficult to figure out exactly how well a company is performing when examining accruals and accounting adjustments. For this very reason, evaluating a company on a cash basis has a great deal of appeal to the financial community.

Simple Cash Flow Formula

When building a cash flow statement, it's important to keep the following in mind:

  • There is a starting balance of cash at the beginning of each accounting period.
  • There may be increases to cash via operations; the company made money on the products or services they sell.
  • Companies use cash throughout the year to pay for things: new assets and expenses.
  • Some companies may choose to raise additional cash throughout the year.

Using the above four pieces of information, it's possible to calculate a fifth value: the cash the company has at the end of the accounting period (or year). These building blocks of a cash flow statement are typically labeled as follows:

Cash and Cash Equivalents (Beginning)

+ Cash from Operations

- Cash Flows from Investing Activities

+ Cash Flows from Financing Activities

= Cash and Cash Equivalents (Ending)

In order to build a cash flow statement, we only need to be concerned with the above five elements.

Cash Flow Statements

The information from this point forward is really a tutorial explaining how to build a cash flow statement, also known as a statement of changes in financial position. As we walk through each step in the process, we'll provide insights and examples. At the end of this tutorial, we're going to provide a link to everything we've discussed in an example statement.

Cash and Cash Equivalents (Beginning)

The first step in this process is to figure out where a company left off in the prior accounting year. This will be the beginning balance for the current year. This

value can be found on the company's prior statement of cash flow, the company's balance sheet. or it's possible to calculate the beginning value for cash.

Cash and cash equivalents are a current asset of a company, and this value can be found by looking at the company's balance sheet. This value can be calculated by adding cash, money market funds. certificates of deposit. savings accounts, and similar types of deposits.

In general, this is a current asset that can be readily exchanged for goods and services on short notice. In this example, we're going to start the company with $6,000,000 at the beginning of the year.

Cash from Operations

Next, we're going to look for cash generated by the operations of the company. This is sometimes referred to as cash provided by operating activities. To calculate the cash provided by operations, we need a starting point, which is net income .

One of the advantages of evaluating a company on a cash basis is that it's not subject to accounting methods that prevent analysts from getting a clear picture of a company's financial health. Unfortunately, net income does include some of those accounting adjustments. To truly understand the cash generated from operations, it's necessary to remove from the net income value what are called "non-cash transactions."

Items not Affecting Cash

While the most common example of a non-cash transaction is depreciation; there are two classes of adjustments to net income required to calculate cash from operations:

  • Depreciation / Amortization of Assets
  • Net Changes in Current Assets and Liabilities

If a company claimed depreciation expense in their income statement, that value needs to be added back. Likewise, if a company had an increase in accounts receivable, that value needs to be subtracted from net income. We're trying to figure out how much cash exchanged hands throughout the year. A company might have sold more goods and had a rise in accounts receivable, but until that money is received it's not considered cash.

Cash from Operations Example

Let's see how the above concepts would be used in practice. In this example, the company had net income of $8,000,000. The depreciation expense was $4,000,000, while accounts receivables went up by $2,000,000 and accounts payable went up by $1,000,000.


Category: Forex

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