The Statement of Cash Flows: Where does all the cash go?

Cash management affects just about every piece of how a business operates. Accountants have long proclaimed that “cash is king,” after all. While small business owners may not think of cash quite so regally, they do often ask a very important question: where does all the cash go?

The statement of cash flows is designed to help answer that question. It is an overview of how a business generates and uses its cash, based on changes in balance sheet accounts. Summarized below are the activities included in each of the three sections of the cash flow statement, as prepared using the indirect method.

Operating Cash Flows Section

The operating section of the statement of cash flows measures net cash generated by a company’s main business purpose, also known as its operations. Operating cash flows can be calculated using this simple formula:

Net Income PLUS Non-cash additions (Depreciation Expense, Amortization Expense, Losses)  MINUS Gains PLUS or MINUS Net Change in Operating Accounts = Net Operating Cash Flows

When adding all the above together, the ending number can be positive or negative. If positive, this means a company’s operations generated more money than they spent, whereas a negative number indicates operations used more cash than was brought in during the reporting period.

Investing Cash Flows Section

The second section of the statement of cash flows calculates cash provided by or used in activities related to long-term, non-current assets. The most common type of activity in this section is the purchase or sale of fixed assets. For example, when a company purchases a new asset, the purchase price, less any amount financed, would be included as a cash outflow. Alternatively, if a company receives cash from the sale of fixed assets, the money is recorded as a cash inflow.

Other activities accounted for as investing cash flows include cash expenditures and proceeds related to ownership interest in other companies or assets held for investment, like stocks and bonds.

Financing Cash Flows Section

The final section of the statement of cash flows is financing. This section calculates net cash from debt and equity activities. If a company acquires any new debt or makes principal payments on existing debt during the year, cash received and disbursed is accounted for here. Equity activity, such as cash dividends or equity contributions, are included in the finance section. Cash received or paid on issuance or repurchase of the company’s own shares would be included in the financing section, as well.

The Final Check

To complete the statement, add the total from each section together. This represents the net increase or decrease in cash for the period. Next, combine the net increase or decrease to ending cash from the prior period. If prepared correctly, the sum of current period activity and prior period cash will tie to cash at the end of the current period. Supplemental information, including reconciliation of cash and equivalents to the balance sheet, cash paid for interest expense and significant non-cash activity, is included at the bottom of the statement.

For additional considerations, please reach out to Carrie Ommen, CPA, Associate Manager, or contact our Accounting Services Team at Mahoney to be of help to you in any way.