The Statement of Cash Flows

Posted on Wednesday, May 22, 2013

The statement of cash flows is one of the hardest in a set of financial statements for a reader to understand; however, it can be a powerful tool used to examine the actual cash flowing in and out of an organization.  The statement of activities shows what the organization earned and owes while the statement of cash flows shows what was actually collected and spent.

The statement of cash flows is a requirement of financial statements prepared in accordance with generally accepted accounting principles.  This statement reports an organization’s cash generated and used during a specific period, classified into operating activities, investing activities and financing activities.

Since the statement of activities is prepared under the accrual basis of accounting, some of the revenues included may not have been collected yet and some of the expenses may not have been paid yet.  Basically the statement of cash flows reconciles the beginning cash balance of the period to the ending cash balance of the period by converting the change in net assets (“net income”) on the statement of activities from the accrual basis to the cash basis.

Cash flows from operating activities can be reported one of two ways, with the same result.  The direct method shows actual cash received and cash paid.  The indirect method, which is the more common method, starts with “net income” and makes adjustments for noncash items, such as depreciation, and then analyzes changes in operating assets and liabilities.

The result is the cash received (or paid out, if negative) for everyday operations.  A positive amount is desired because it shows that the everyday operations are producing cash for the organization to use to continue its existence.

Cash flows from investing activities include cash used from lending money to others, purchasing investments and fixed assets and cash received from collecting on loans, selling investments and selling fixed assets.  These transactions are not a part of everyday operations so they are not included in cash flows from operating activities.  The result is the amount of cash from (or used in, if negative) investing activities.

Cash flows from financing activities include cash received from borrowing money and cash used in repaying amounts borrowed.  Again, these transactions are not a part of everyday operations of the organization so they are not included in cash flows from operating activities.  The result is the amount of cash from (or used in, if negative) financing activities.

It is important for management to understand where cash is coming from and what it is being used for to better manage the organization.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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