Comparative Balance Sheets for a Business

where do dividends go on the balance sheet

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The business owner must also have information from both the income statement. The primary information needed from the income statement is net income (or loss) and depreciation as both are considered cash flows to the firm.

NOTE: We are not using the figures from the sample income statement here in this analysis.

Analysis of Comparative Balance Sheets

In order to analyze your comparative balance sheets and develop your Statement of Cash Flows. you first consider any increases or decreases in your current asset and current liability accounts between the two years of balance sheet information.

Here's the rule you should always remember when developing your Statement of Cash Flows:

Increases in current asset accounts. decrease cash.

Decreases in current asset accounts, increase cash.

Increases in current liability accounts, increase cash.

Cash Flows From Operating Activities

Looking at the balance sheets, accounts receivable has increased from $170,000 to $200,000 for an increase of $30,000. Since that increase occurred on the asset side of the balance sheet, it is shown as a negative figure.

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Why? If the firm extended $30,000 more in credit to its customers, then it had $30,000 less to use. Likewise, inventory increased by $20,000. Prepaid expenses decreased by $10,000. A decrease in asset account, a source of funds to the firm, is a positive number. Cash is not included in our initial analysis. It will soon become clear why.

Now look at the liabilities section of the balance sheet. Accounts payable increased by $35,000. Short-term bank loans didn't change. Accrued expenses such as taxes and wages decreased by $5,000. Since this is a decrease in a liability account, it is a use of funds to the firm and a negative number.

Next is Net Cash Flows from Operating Activities, the summary of the first section

of the Statement of Cash Flows. When you add up the adjustments to net income and depreciation, you get $150,500. The firm is generating a positive net cash flow from its operating activities.

Cash Flows From Investing Activities

The next section of the cash flow statement is Cash Flows from Investing Activities. Usually, this section includes any long-term investments the firm makes plus any investment in fixed assets, such as plant and equipment. The firm invested $30,000 more in long-term investments in 2009. That shows up as a negative number as it was a use of assets. The firm also spent $100,000 for more plant and equipment.

Next is Net Cash Flows from Investing Activities. the summary of the second section of the Statement of Cash Flows. It is a negative $130,000 since this was the outlay in 2009.

Cash Flows From Financing Activities

The last section of the cash flow statement is Cash Flows from Financing Activities. In this case, you have financed your firm with long-term bank loans that have increased by $50,000. Dividends to investors in the amount of $65,000 have also been paid, which is a cash outflow and a negative number. Net Cash Flows from Financing Activities is a negative $15,000.

Net Cash Flows for the Firm

Now, we combine the three sections of the cash flow statement to see where the firm is from a cash flow perspective. When you sum the net cash flows from each section you get a positive $5,500. This is the net increase in cash flows over the year for the business firm. Looking back at the cash account on the comparative balance sheets, the analysis is correct. Cash has increased by $5,500 from year to year.

Now go to the Statement of Cash Flows and finish developing your cash flow statement!

XYZ Company Comparative Balance Sheets


Category: Forex

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