How to Read a Statement of Cash Flows

You can read this content as a transcript:

Hello, my name is T.J. Sheldon. I’m an associate director over at Mahoney in St. Paul, Minnesota. Today I’d like to talk to you about how to prepare and read a standard statement of cash flows. First of all, we’re going to start with the balance sheet assets consisting of cash investments, accounts receivable, prepaid expenses, some equipment that’s being depreciated, and then some liabilities for accounts payable, accrued expenses, and long-term debt.

First, we’ll go over to the cash flow worksheet. This worksheet consists of all of the balance sheet accounts on the left-hand side, and then a column for 2023 amounts and 2022 amounts. Then we have a column with the change, and you can see the change that’s highlighted in yellow is the change in our cash between last year to this year, our totals for operating, investing and financing. The totals of those changes we want to agree to the $20,000 that’s highlighted in yellow under the cash and cash equivalents. And you can see when I highlight these three columns, the totals, they match up to the $20,000, which I have highlighted here.

To start off the statement of cash flows, there’s operating, investing and financing, and the operating section mainly consists of all of the operating activities of your business. Investing consists of investment gains and losses, purchases of equipment or a building, purchases of investments and things like that. Financing generally consists of debt and equity. You could have proceeds from debt, you could have payments on debt, you could have capital contributions and things like that. Once we have the changes, we have to go through each line item to decide which column that appropriately fits there. We don’t have to touch the cash because the change in the cash is the cash amount at the end of the year.

Investments, the $30,000 that’s investments. We purchased $30,000 of investments, so we’re going to put that under our investing column. Accounts receivable, prepaid expenses, those are part of our regular operating expenses, so we’re going to put those under the operating column. Equipment is, as we show here, a five-year asset depreciating annually at $1,000. So we’re going to have the operating at $1,000 depreciation. However, the change is only $500, so it appears that we had a $500 purchase of equipment. Accounts payable and accrued expenses also changed and they go under the operating column. And lastly, the long-term debt went down and that’s going to be under our financing column. And then we have our change in members equity, and that’s all of our, all of the net income that we made this year. That could also consist of capital contributions if some of those were made, but under this instance that did not happen.

So we’ll take these amounts and go over to the statement of cash flows, which we start off with a net income for the year of $15,500, which matches our worksheets. And then the rest of these amounts are linked to the worksheet. We start off reconciling the operating activities and these operating activities we’re adjusting for non-cash activities. So depreciation was $1,000. That’s a non-cash activity, so we’re adding that back to accounts receivable that had gone up $3,000 and the sales for the accounts receivable are included in our net income. However, we haven’t received the cash, so we’re deducting it from the net income since we’re trying to adjust for net cash flow and so on. With the prepaid expenses and the accounts payable, that brings us change from operating activities $15,500. We go down further to the investment/investing activities and we had purchases of investments. Our investments went up $30,000 because we purchased $30,000 of investments, and then we had purchased some equipment for $500. That brings us to total net cash from investing activities of a negative $30,500. Next down is the cash flow from financing activities, and this only consists of payment of long-term debt. Our debt decreased $5,000, so it’s a negative amount on this statement of cash flows. And then in total, we had a total decrease in cash and cash equivalents of $20,000, which consists of this $15,500 of operating activities, $30,500, a negative amount from investing and the negative $5,000 from financing activities, which consist of negative $20,000.

Then we start off to reconcile cash. We want to reconcile it with the beginning balance at which is actually your December 31st, 2022 amount. That was over on our balance sheet. You can see that was $120,000. So we start off with our beginning cash of $120,000. Then we use $20,000 in cash, which brings us down to $100,000 of cash at the end of the year, which we also reconcile at the bottom here. If there was other cash accounts on our balance sheet, we would add them into this reconciliation also. But this $100,000 matches right up to our $100,000 over on our balance sheet.

That is all I have for you today. I hope you learned something and thank you very much.