How To Construct a Cash Flow Statement

Writing financial analysis

The financial statement of a business reports the company’s financial performance and position for a particular period of time. The financial statement comprises three documents, which are the income statement, the balance sheet, and the cash flow statement. The cash flow statement shows the money that’s coming in and out of the business enterprise. We will focus on how to construct a cash flow statement in this article. Below are the steps and tips to guide you.

  • Start with the company’s net income for the current period. If a company just took cash for services and items sold, and pay cash for services and items bought, then the net income is the cash flow of the company. But, most business enterprises add allowances for depreciation and amortization of assets and other non-cash contracts that are subtracted or added to have an exact report of provided cash that is used by the enterprise.
  • Make cash flow reports from the main business line of the enterprise. Example of this is Cash Flows from Operating Activities. It is comprise of cash receipts from services and performance sales and cash expenses from employee salaries, suppliers, vendors, landlords, utilities, and other people who are contributing to produce the income of the company. Subtract the non-cash profits like accounts receivable, then add the back expenditures that do not require cash like depreciation and amortization. Your net result will be called Cash Provided (or Used) by Operating Activities.
  • Utilize the segment Cash Flows from Investing Activities. Use it to make a report on cash expenditures for the purchase of equipment, business property, stock of other business establishment, or other assets of the business enterprise. A raise in assets other than cash equivalents and cash is a decrease in cash, while investments or a sale of assets is an increase in cash. The net result will be Cash Provided (or Used) by Investing Activities.
  • Allocate the activities as Cash Flows from Financing Activities. Use it if there is equity financing or company debt. These include the proceeds and repayment of notes, loans, and other debt instruments. The cash received from the company stock issuance, and stockholder payments for return of capital or dividends is also included. Stock increases cash or issuing debt instruments while repurchasing company stock or retiring debt decreases cash. The transactions result is Cash Provided (or Used) by Financing Activities.
  • Build the last section of your cash flow statement. You can begin with the cash balance of the company at the start of the period. Subtract the net cash used or add the net amount of cash provide from the mentioned three activities. The cash balance is the result at the end of the period.

To prepare the cash flow statement properly, you have to analyze carefully to identify the changes in the company’s balance sheet and the income accounts. You need to identify how the changes affect the cash and cash equivalent. The cash flow statement is an analytical tool that you can use in understanding the company’s short-term liquidity, with focus on the company’s ability to pay expenses.


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