The purpose of any financial statement is to provide information about an entity’s transaction history that is USEFUL for internal and external users.
You can read more about accounting and the purpose of Financial Statements here (refer to What is accounting blog).
Financials must also be made using the Accrual Method of Accounting if prepared for external users. (refer to accrual blog)
Depending on your age, business structure, and personal preference, the Statement of Cash Flow is also called the Cash Flow Statement.
This financial statement explains how cash flowed throughout the entity.
This statement explains how and why cash and cash equivalents changed.
Cash and Cash Equivalents are items that are currently short-term, highly liquid investments (assets) and can be converted to Cash in a short period of time, usually 90 days or less.
Since financials are usually prepared using the Accrual Basis of Accounting, revenues and expenses (as well as other items) are recorded without the related cash impact.
However, cash is king in any business, so it is crucial that business owners understand where their cash went each period.
Cash Flow is broken into three major activities: Operating, Investing and Financing:
Producing goods and/or delivering services to customers. Everything NOT included in other activities is by default Operating activities.
Cash flow changes as a result of Gains / Losses. In other words, a change in cash is not a result of the core business.
Changes in cash due to Equity transactions, such as raising capital, repaying investors, paying cash dividends, etc…
When analyzing this financial statement, you can reconcile Net Income to Cash and explain how and why the Cash Balances change during each period.
Disclaimer:
This publication is designed to provide information on federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.
This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.
This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.
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