Cash Flow Statement for Beginners

Introduction

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

Importance of Cash Flow Statement

• Essential in Accounting Methods:
  • Cash Method: Revenue recognized when cash is received; expenses recorded when cash is paid.
  • Accrual Method: Revenue recognized when earned; expenses recorded as incurred.
• IFRS and GAAP Compliance: Only accrual method permitted. Requires separate Cash Flow Statement.

Role of Cash Flow Statement

• Provides insight into a business's financial health.
• Cash Method: Income Statement = Cash Flow Statement.
• Accrual Method: Income Statement ≠ Cash Flow Statement.

Structure of a Cash Flow Statement

1. Opening Cash Amount: Found in the Balance Sheet.
2. Closing Cash Amount: Comparison to find cash increase or decrease.
3. Sections:
   • Operating Activities: Main revenue-generating cash flows (e.g., sales revenues).
   • Investing Activities: Outside core operations (e.g., buying/selling of long-term assets).
   • Financing Activities: Funding through debt/equity (e.g., bank loans, dividends).

Methods of Preparing Cash Flow Statement

• Direct Method:
  • Cash receipts from customers = Revenue.
  • Cash paid to suppliers/employees.
  • Direct calculation mirrors cash method Income Statement.
• Indirect Method:
  • Begins with net profit/loss from the Income Statement.
  • Non-cash expenses added back (e.g., depreciation, amortization).
  • Adjust for working capital changes.

Example: Tumble's Cash Flow Statement (Indirect Method)

Required Inputs

• Income Statement: Contains revenues and expenses.
• Comparative Balance Sheet: Shows changes in assets, liabilities, and equity over time.
• Key Facts:
  • Sale of furniture at a loss, purchase of equipment.
  • Debt raised, stock issued, dividends paid.

Steps to Prepare

1. Operating Activities:
   • Start with net profit from Income Statement.
   • Reverse non-cash expenses (e.g., depreciation).
   • Adjust for working capital changes (e.g., receivables, payables).
   • Example: Tumble had a net cash inflow of $4,855,000.
2. Investing Activities:
   • Record cash outflows for asset purchases; inflows for sales.
   • Example: $900,000 net cash outflow.
3. Financing Activities:
   • Record debt and equity changes; dividend payments.
   • Example: $850,000 net cash outflow.

Conclusion

• Total cash flows from all sections provide net increase/decrease.
• Tumble's net cash increase was $3,105,000.

Additional Resources

• Cheat Sheets: Available for direct and indirect methods.
• Further Learning: Recommended videos on Income Statements and Balance Sheets.

Closing Remarks

• Summary and reconciliation of Cash Flow Statement illustrate financial health.
• Encouragement to engage with content further and provide feedback.