How to prepare a cash flow statement

A statement of cash flows contains information about the flows of cash into and out of a company, and the uses to which the cash is put. The statement is comprised of three sections, in which are presented the cash flows that occurred during the reporting period relating to the following:

  • Operations
  • Investing activities
  • Financing activities

The statement of cash flows is part of the financial statements, and as such is heavily reviewed by the users of the financial statements.

The most commonly used format for the statement of cash flows is called the indirect method. The general layout of an indirect method statement of cash flows is shown below, along with an explanation of the source of the information in the statement. The sources of information appearing in the table can be used to prepare a cash flow statement.

ABC Company
Statement of Cash Flows (indirect method)
for the year ended 12/31/20X1

Line Item Derivation
Cash flows from operating activities
 
Net income
From the net income line on the income statement
Adjustments for:
 
  Depreciation and amortization
From the corresponding line items in the income statement
  Provision for losses on accounts receivable
From the change in the allowance for doubtful accounts in the period
  Gain/loss on sale of facility
From the gain/loss accounts in the income statement
  Increase/decrease in trade receivables
Change in trade receivables during the period, from the balance sheet
  Increase/decrease in inventories
Change in inventories during the period, from the balance sheet
  Increase/decrease in trade payables
Change in trade payables during the period, from the balance sheet
Cash generated from operations
Summary of the preceding items in this section
   
Cash flows from investing activities
 
Purchase of fixed assets
Itemized in the fixed asset accounts during the period
Proceeds from sale of fixed assets
Itemized in the fixed asset accounts during the period
Net cash used in investing activities
Summary of the preceding items in this section
   
Cash flows from financing activities
 
Proceeds from issuance of common stock
Net increase in the common stock and additional paid-in capital accounts during the period
Proceeds from issuance of long-term debt
Itemized in the long-term debt account during the period
Dividends paid
Itemized in the retained earnings account during the period
Net cash used in financing activities
Summary of the preceding items in this section
   
Net change in cash and cash equivalents
Summary of all preceding subtotals

A less commonly-used format for the statement of cash flows is the direct method. The general layout of the direct method statement of cash flows is shown below, along with an explanation of the source of the information in the statement. This information can be used to prepare a cash flow statement.

ABC Company
Statement of Cash Flows (direct method)
for the year ended 12/31/20X1

Line Item Derivation
Cash flows from operating activities  
Cash receipts from customers
Summary of the cash receipts journal for the period
Cash paid to suppliers
Summary of the cash disbursements journal for the period (less the financing payments noted below)
Cash paid to employees Summary of the payroll journal for the period
Cash generated from operations Summary of the preceding items in this section
   
Interest paid
Itemized in the cash disbursements journal
Income taxes paid Itemized in the cash disbursements journal
Net cash from operating activities Summary of the preceding items in this section
   
Cash flows from investing activities
 
Purchase of fixed assets Itemized in the fixed asset accounts during the period
Proceeds from sale of fixed assets
Itemized in the fixed asset accounts during the period
Net cash used in investing activities Summary of the preceding items in this section
   
Cash flows from financing activities  
Proceeds from issuance of common stock Net increase in the common stock and additional paid-in capital accounts during the period
Proceeds from issuance of long-term debt Itemized in the long-term debt account during the period
Principal payment under capital leases Itemized in the capital leases liability account during the period
Dividends paid Itemized in the retained earnings account during the period
Net cash used in financing activities Summary of the preceding items in this section
   
Net change in cash and cash equivalents Summary of all preceding subtotals