Cash Flow Statement for Beginners

Introduction

• Presenter: James from Accounting Stuff
• Topic: Understanding the Cash Flow Statement
• Purpose: To summarize a business's cash inflows and outflows over a period

Why is a Cash Flow Statement Needed?

• Accounting Methods:
  • Cash Method: Recognizes revenue when cash is received and expenses when paid.
  • Accrual Method: Revenue recognized as earned; expenses recorded as incurred.
• Statements:
  • Cash Accounting: Income Statement is equivalent to Cash Flow Statement.
  • Accrual Accounting: Requires separate Cash Flow Statement and Balance Sheet alongside the Income Statement.
• Regulations: IFRS and GAAP require accrual method.

Structure of a Cash Flow Statement

• Basic Components:
  • Opening Cash Amount
  • Closing Cash Amount
  • Net Increase/Decrease in Cash
• Three Main Sections:
  1. Operating Activities: Main revenue-generating activities.
  2. Investing Activities: Buying/selling of investments or long-term assets.
  3. Financing Activities: Raising or repaying cash through liabilities or equity.

Methods for Preparing a Cash Flow Statement

• Direct Method:
  • Mirrors the Income Statement under cash method.
  • Involves cash receipts from customers and cash payments to suppliers/employees.
• Indirect Method:
  • Begins with net profit/loss from the Income Statement.
  • Adjusts for non-cash expenses (e.g., depreciation, amortization).
  • Adjusts for movement in working capital.
  • Easier to prepare from Income Statement and Balance Sheet.

Example: Tumble's Cash Flow Statement

• Context: Business is a fictional dating app.
• Requirements:
  • Income Statement for Tumble.
  • Comparative Balance Sheet for current and previous year.
  • Key facts about transactions during the year.
• Key Transactions:
  • Sold furniture for $10,000 (original cost $20,000, depreciation $5,000).
  • Bought computer equipment for $910,000.
  • Raised $100,000 in long-term debt.
  • Issued $50,000 in common stock.
  • Paid $1,000,000 in dividends.

Cash Flow Statement Steps (Indirect Method)

1. Operating Activities:

   • Start with net profit ($9,650,000).
   • Add back non-cash expenses ($850,000).
   • Adjust for loss on sale of long-term assets ($5,000).
   • Adjust for changes in working capital:
     • Increase in receivables reduces cash flow.
     • Decrease in payables reduces cash flow.
   • Net cash inflow from operating activities: $4,855,000.

2. Investing Activities:

   • Cash outflow for computer equipment: $910,000.
   • Cash inflow from sale of furniture: $10,000.
   • Net cash outflow from investing activities: $900,000.

3. Financing Activities:

   • Received $100,000 in long-term debt.
   • Raised $50,000 in equity.
   • Paid $1,000,000 in dividends.
   • Net cash outflow from financing activities: $850,000.

4. Conclusion:

   • Net increase in cash: $3,105,000.
   • Reconciles with the increase seen in the Balance Sheet.

Conclusion

• Direct method easier to read, but indirect method easier to prepare.
• Resources available for further learning (cheat sheets, videos).
• Encouraged to support the channel for more content.