Introduction to the Basic Cash Flow Statement
The basic cash flow statement is one of the main accounting statements.
The cash flow statement shows a business’s cash inflow and cash outflow over an accounting period. The accounting period can be any length but is usually a month or a year. In contrast to the income statement and the balance sheet which are presented on an accruals basis, the cash flow statement is presented on a cash basis.
What Should a Cash Flow Statement Look Like?
The layout of a cash flow for a company for annual reporting purposes is legally defined. However, for management account purposes the layout should be in the format most useful for managing the business. A typical and useful indirect method cash flow format for management is shown in the example below.
| Net income | 11,000 |
| Depreciation | 12,000 |
| Loss on sale of assets | 3,000 |
| Gain on sale of investments | -4,000 |
| Changes in working capital | -5,000 |
| Operating activities | 17,000 |
| Purchase of assets | -45,000 |
| Proceeds from the sale of investments | 10,000 |
| Proceeds from the sale of assets | 5,000 |
| Investing activities | -30,000 |
| Issue of new capital | 12,000 |
| Issue of new debt | 26,000 |
| Repayment of debt | -8,000 |
| Dividend payments | -2,000 |
| Financing activities | 28,000 |
| Net cash flow | 15,000 |
| Beginning cash balance | 1,000 |
| Ending cash balance | 16,000 |
As an example, the annual report for Apple shows a typical cash statement layout.
Operating, Investing and Financing Activities
The basic cash statement sets out to show cash movements during the accounting period.
The cash flow statement is split into three sections, operating activities, investing activities, and financing activities. Each section deals with a particular type of cash flow as follows:
- Operating cash flows – generated by the main revenue producing activities of the business
- Investing cash flows – result in a change to long term assets
- Financing cash flows – result in a change in either equity or borrowings
Further details on each of these cash flows sections can be found in our classification of cash flows tutorial.
At the end of the cash flow statement, all of these cash flows are totalled to give a net cash flow which represents the net cash received or paid by the business during the accounting period.
The cash balance at the end of the accounting period is calculated by adding together the net cash flow and the cash balance at the start of the accounting period. The ending balance should always agree to the cash balance shown on the balance sheet of the business.
The example given above is referred to as an indirect cash flow statement an alternative method of presentation is the direct method cash statement which sets out to show cash receipts from sales, interest and dividends, and cash payments for expenses, interest and income tax.
Understanding the Basic Cash Statement
Cash flow is the key to business survival. A business can continue for a period of time without profits but it cannot continue if the cash runs out.
The basic cashflow statement will demonstrate to suppliers and the banks that the business has sufficient resources to meet its cash requirements. Any number of people could be using your basic cashflow statement to make decisions about your business. It is important that you have an understanding of what information the cash flow is providing and what that information is telling you.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.