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How to Prepare a Statement of Cash Flows

Updated: Feb 26

By: Sonia Lee Ng

Published: July 3, 2023

The Statement of Cash Flows

The Statement of Cash Flows is a financial report that details the cash inflows and cash outflows of a business during a certain period. Preparing a statement of cash flows is an essential part of the financial reporting of a business.

It provides valuable information about a company's cash inflows and outflows during a specific period that is used for decision making.

Here is a guide to help you in preparing a statement of cash flows:

  1. The Statement of Cash Flows consist of Three Sections:

    • Operating Activities: Cash flows from day-to-day operations, including revenue, expenses, and working capital charges.

    • Investing Activities: Cash flows from buying or selling long-term assets, investments, or business acquisitions.

    • Financing Activities: Cash flows from activities related to debt, equity, dividends, or capital transactions.

2. You need to gather the Financial Statements: Collect the following financial statements for the period you are preparing the cash flow statement:

  • Income Statement:

  • Balance Sheet

3. If you are using the Indirect Method to calculate cash flows from Operating Activities, you need to determine the Beginning Balance of Cash and Cash Equilvaments. This is the beginning balance of cash and cash equivalents at the beginning of the reporting period.

4. Determine Cash Flow Categories: Identify the specific items that fall into each cash flow category:

  • Determine cash flow from operating activities: Cash received from customers, cash paid to suppliers, salaries, taxes paid, etc.

  • Determine cash flow from investing activities: Cash used for purchasing or selling assets, investments, or business acquisitions.

  • Determine cash flow from financing activities: Cash received from issuing debt or equity, repayment of loans, dividends paid, etc.

5. Adjust Net Income for Non-Cash Items:

  • Start with net income from the income statement

  • Make adjustments for non-cash items: add back depreciation and amortization and adjust for changes in working capital.

6. Analyze Balance Sheet Changes:

  • Review changes in balance sheet accounts between the beginning and end of the period.

  • Identify changes in current assets and liabilities and determine their impact on cash flows.

7. Calculate Cash Flows:

  • Operating Activities: Summarize cash inflows and cash outflows related to operations, using etiher the direct or indirect method. The indirect method adjusts net income for non-cash items and changes in working capital.

  • Investing Activities: Calculate the net cash flow resulting from buying or selling assets or investments.

  • Financing Activities: Determine the net cash flow from activities related to debt, equity, dividends, or capital transactions.

8. Prepare the Statement of Cash Flows: Present in a format in the following order by including the following sections:

  • Beginning cash and equivalents

  • Cash flows from operating activities

  • Cash flows from investing activities

  • Cash flows from financing activities

  • Ending cash and equivalenets

9. Review and Cross-Check: Double-check the accuracy of calculations and ensure that the statement of cash flows aligns with the information in the income statement and balance sheet.

10. Disclose Supplementary Information: Provide any additional information or explanations necessary to understand the statement of cash fllows, such as significant non-cash transactions or changes in accounting policies.

11. Seek professional assistance if needed: If you are not sure how to prepare the statement of cash flows or need assistance with complex transactions, consider consulting with an accountant or a professional to ensure the accurate preparation and presentation of the statement of cash fllows.

Follow applicable accounting standards and regulations when preparing the financial statements.

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