#Accounting - The Statement of Cash Flows

Question

If "cash is King" like you said in your earlier post, then is there an accounting statement that shows cash use by a company?

Answer

Yes there is - the Statement of Cash Flows

Analsys

I did previously state that there is an adage in business that "cash is King". And you are absolutely right that there needs to be a report that shows the cash condition of a business. To that end, a report was created that is called the Statement of Cash Flows and it specifically tracks the cash activity of a business. Since it is a report that shows change over a period of time, it is akin to an Income Statement in that it shows a range of time rather than a snapshot of a status (like the Balance Sheet).

The way the report works is that it starts with a company's Net Income number, which is generated under the accrual method of accounting. It then dissects that number, looking at all the changes to cash (and, in fact, the entire balance sheet) due to Operations, Investment activity, and Financial activity.

In the Operation section of the report, all the changes that happen on the balance sheet (say for instance that Receivables increase by $10,000, that number is backed out. If Payables increase by $10,000, that activity is also backed out) that relate to Short Term assets and liabilities (short term meaning those assets and liabilities that are anticipated to be held for one year or less).

In the Investment section of the report, all the changes that happened related to the Long term assets are shown. This will relate to the purchase and sale of fixed assets and other long term assets.

The Finance section of the report shows all the changes related to Long term liabilities and equity, such as changes in bank loans (acquisition of new funding and the paying off of balances), and also changes related to the issuance/cancellation of shares.

All these changes are applied to the cash balance at the end of the prior term and results in the new cash balance (at then end of the current term).

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Comments and questions always welcome!

#Accounting - What's a Balance Sheet? What's an Income Statement?

Question

What's a Balance Sheet? What's an Income Statement?

Answer

They are the two most basic accounting statements/reports. The Balance Sheet answers "Where are we right now?" and the Income Statement answers "How much did we earn over a given period of time?"

Analysis

 I've talked about T accounts and Debits and Credits in prior posts. The Balance Sheet and Income Statement arise directly from the activity recorded in the T accounts.

When preparing an Income Statement, we look at a period of time. For instance, a statement that is being done to show the activity for the year ending December 31, 2018 will be titled "Income Statement for the year, ending December 31, 2018). The report itself lists Sales and other Income related to the ordinary course of business (natural Credits) and subtracts from that Expenses and other costs related to the earning of that income (natural Debits).

When preparing a Balance Sheet, we pick a date that the statement will be of. For instance, a statement that is being done as of December 31, 2018 is titled "Balance Sheet as of December 31, 2018" (exciting stuff, right?). The report itself lists Assets on one side (the natural Debits) and the Liabilities and Equity on the other side (the natural Credits). The activity from the Income Statement is listed as a change in Equity.

Together, the two reports show a company's activity from ordinary activity and can be of tremendous help in guiding management and other decision makers on the health and activity of the business.

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Feel free to ask a question!