Presented by: Linda W. Dufresne, CPA
How to Prepare a Cash Flow Statement What is a Cash Flow Statement?
1. 2. 3. 4. Traces the flow of funds (or working capital) in and out during an accounting period. Used to assess the timing, amount and predictability of future cash flows “Where did the money come from?” “Where did it go?” Cash flow is not the same as change in net assets a. Cash flow will not match the amount of change in net assets on your revenue, expense and change in net assets statement. b. Change in net assets includes noncash items, such as depreciation. c. Adjust change in net assets to compute cash flow
Notes... A cash flow statement is concerned only with cash and cash equivalents. This includes cash on hand, cash in the bank, and any cash invested in what is defined as short-term, highly liquid financial instruments. Generally, only instruments with original maturities of three months or less qualify as cash equivalents. Accepted cash equivalents include treasury bills, commercial paper, and money market funds. An additional statement reconciling the change in net assets shown on statement of revenues, expenses and changes in fund net assets with cash flow from operating activities must be prepared Best method to report cash flow information
1. Categories to organize cash flow data a. Operating activities – involve the cash effects of transactions that enter into the determination of change in net assets b. Noncapital financing activities – include interfund transfers c. Capital and related financing activities – include transactions related to capital borrowing, purchases and repayment d. Investing activities – include transactions related to purchase, sale, maturity and dividend/interest on investments e. the sections of the cash flow statement work together to show the net change in cash for the period 2. Two possible approaches to reporting cash flows a. direct method b. indirect method 3. direct method considered to be a more useful rendering of a company’s use of cash 4. Since 1987, the Financial Accounting Standards Board encouraged the use of the direct method
5. GASB a. #9, issued in 1989, established the requirement for governments to present a statement of cash flows for their proprietary funds b. #34, paragraph 105, eliminates that option and requires operating cash flows to be reported using the direct method 6. We will only discuss the direct method in detail
How to proceed?
1. Do I have a record of what was paid to suppliers and employees during the time applicable period? 2. Do I have revenue, expense and changes in fund net assets and a statement of net assets for the same period for which I am constructing the cash flow statement? 3. Do I have a system to record the inflow of revenues?
Cash flow from operating activities
1. Includes: a. Receipts from customers b. Payments to suppliers c. Payments to employees d. Internal activity – payments to other funds e. Claims paid f. Other receipts (payments) 2. Probably the most complex section 3. Any cash transaction related to ongoing business 4. Business activities that are responsible for most of the transactions 5. healthiest means of generating cash 6. show the extent to which day-to-day operating activities have generated more cash than has been used 7. in-depth knowledge of the business and its accounting methods is required 8. preparer needs to be thoroughly familiar with the manner in which sales are recorded and expenses are incurred and paid 9. To compute total net cash from operating activities a. Any use of cash (such as payments to suppliers or employees) is subtracted b. Any source of cash (such as cash sales) is added
Cash Flows from Noncapital Financing Activities
1. Operating subsidies 2. transfers from to other funds
Cash Flows from Capital and Related Financing Activities
1. 2. 3. 4. proceeds from capital debt capital contributions repayment of capital debt principal and interest purchases of capital assets
Cash Flows from Investing Activities
1. Changes to your cash position owing to the buying or selling of investments 2. includes a. proceeds from sales and maturities of investments b. proceeds used to purchase investments c. Interest and dividends
Reconciliation of cash flow from operating activities to change in net assets
1. change in net assets is adjusted to take into account changes during the period as shown on the statement of net assets in the following accounts and other asset and liability accounts appearing on the statement of net assets 2. Activities are classified as operating, investing, or financing activities 3. If a change affecting cash occurred, the amount of the change is noted a. The change is recorded in the reconciliation section of the cash flow statement b. depreciation and amortization 1. no cash component 2. add back to net assets c. accounts receivable change 1. increase, deduct from change in NA 2. decrease, add to change in NA d. inventory 1. increase, deduct from change in NA 2. decrease, add to change in NA e. accounts payable 1. increase, add to change in NA 2. decrease, deduct from change in NA f. accrued wages payable 1. increase, add to change in NA 2. decrease, deduct from change in NA g. Prepaids 1. increase, deduct from change in NA 2. decrease, add to change in NA 4. Once these adjustments are made, you can reconcile the change in net assets to the cash flow from operating activities
HOW TO ANALYZE A CASH FLOW STATEMENT
1. much closer to understanding financial position 2. statement of net assets and change in net assets are tools for management a. without a cash flow statement they are limited barometers b. may even be misleading 3. Operating Activities a. tell you where money came from and how it was used b. whether cash generated or whether need a cash infusion
4. Noncapital Financing Activities a. may indicate a diversion of funds b. may indicate inadequate charges for services 5. Capital and Related Financing Activities a. see whether or not a surplus in operations is being used to “grow” b. lack of purchases of assets, etc may indicate stagnant growth or a diversion of funds 6. Investing Activities a. see whether or not a surplus in operations is being used generate investment income b. lack of investing activities may indicate inappropriate investing policies 7. comparison between past periods a. good idea of the trend b. Positive or negative trends in cash flow may encourage appropriate action 8. powerful tool for growth and long-term success