Cash Flow Tutorial

[Cary Polachek]

Thefirst step in preparing a cash flow statement is determining the starting balance of cash and cash equivalents at the beginning of the reporting period. This value can be found on the income statement of the same accounting period.

After calculating cash flows from operating activities, you need to calculate cash flows from investing activities. This section of the cash flow statement details cash flows related to the buying and selling of long-term assets like property, facilities, and equipment. Keep in mind that this section only includes investing activities involving free cash, not debt.

When using GAAP, this section also includes dividends paid, which may be included in the operating section when using IFRS standards. Interest paid is included in the operating section under GAAP but sometimes in the financing section under IFRS.

The change in net cash for the period is equal to the sum of cash flows from operating, investing, and financing activities. This value shows the total amount of cash a company gained or lost during the reporting period. A positive net cash flow indicates a company had more cash flowing into it than out of it, while a negative net cash flow indicates it spent more than it earned.

This cash flow statement is for a reporting period that ended on Sept. 28, 2019. As you'll notice at the top of the statement, the opening balance of cash and cash equivalents was approximately $10.7 billion.

During the reporting period, operating activities generated a total of $53.7 billion. The investing activities section shows that the business used a total of $33.8 billion in transactions related to investments. The financing activities section shows that a total of $16.3 billion was spent on activities related to debt and equity financing.

At the bottom of the cash flow statement, the three sections are summed to total a $3.5 billion increase in cash and cash equivalents over the course of the reporting period. Therefore, the final balance of cash and cash equivalents at the end of the year equals $14.3 billion.

The balance sheet and cash flow statement are fundamental tools in financial analysis. However, these documents serve distinct purposes and offer different insights into your organization's financial health.

A balance sheet provides a snapshot of a company's financial position at a specific point in time, detailing assets, liabilities, and shareholders' equity. As a result, it offers an overview of what a company owns and owes. In contrast, a cash flow statement focuses specifically on the movement of cash within an organization over a reporting period, categorizing cash activities into operating, investing, and financing activities.

Understanding how to create, interpret, and effectively use financial statements is pivotal for strategic decision-making. Financial statements, particularly, are essential tools that extend beyond simple record-keeping that can guide your business strategy.

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A cash flow statement is one of the three key financial statements, along with the balance sheet and income statement. It shows the sources and uses of cash from three main business activities: operating activities, investing activities, and financing activities.

A cash flow statement template also ensures you use a widely accepted and understood format. Lenders and investors often want to review your statement of cash flows before making a loan or investing money in your business, so using templates ensures your financial statements are accurate, professional, and easy to read.

Both U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) allow companies to use either the direct or indirect method for preparing a statement of cash flows.

The direct method itemizes the cash received from customers and cash payments for supplies, staff, debt and income tax payments, etc. It ignores non-cash transactions, such as depreciation or accrual basis transactions.

Finally, add up the cash provided or used by operating, investing, and financing activities. The result is the net increase or decrease in cash for the specific period covered by your cash flow statement.

However, a closer look shows how the company is using its cash. For example, the operating activities section shows Apple generated over $104 million in cash from its core operations. Meanwhile, the financing activities section shows the company spent nearly $86 million repurchasing common stock.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

Most companies use the accrual basis accounting method. In these cases, revenue is recognized when it is earned rather than when it is received. This causes a disconnect between net income and actual cash flow because not all transactions in net income on the income statement involve actual cash items. Therefore, certain items must be reevaluated when calculating cash flow from operations.

The CFS is distinct from the income statement and the balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded as revenues and expenses. Therefore, cash is not the same as net income, which includes cash sales as well as sales made on credit on the income statements.

Using the indirect method, actual cash inflows and outflows do not have to be known. The indirect method begins with net income or loss from the income statement, then modifies the figure using balance sheet account increases and decreases, to compute implicit cash inflows and outflows.

Neither is necessarily better or worse. However, the indirect method also provides a means of reconciling items on the balance sheet to the net income on the income statement. As an accountant prepares the CFS using the indirect method, they can identify increases and decreases in the balance sheet that are the result of non-cash transactions.

It is useful to see the impact and relationship that accounts on the balance sheet have to the net income on the income statement, and it can provide a better understanding of the financial statements as a whole.

Put simply, discounted cash flow analysis rests on the principle that an investment now is worth an amount equal to the sum of all the future cash flows it will produce, with each of those cash flows being discounted to their present value.

So, the amount that $1,500 three years from now is worth to you today depends on what rate of return you can compound your money at during that period. If you have a target rate of return in mind, you can determine the exact maximum that you should be willing to pay today for the expected return in 3 years.

The business has been passed down through three generations and is still going strong with a growth rate of about 3% per year. It currently produces $500,000 per year in free cash flows, so this investment into a 20% stake will likely give you $100,000 per year in cash, and will likely grow at a 3% rate per year.

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