Tuesday, January 12, 2010

Statement of Cash Flows

I'm doing Continuing Professional Education (required for my CPA license) and today I reviewed the Statement of Cash Flows.

This is one of the major financial statements. It answers the question, "My Income Statement says I'm making a profit, so where did all my money go?" This is The Big Question people have asked me for years and years.

The problem is that some of the profit came from accruals, such as deferred revenues that became "undeferred" and now hits Income. Not all expenses were cash outlays, either. Depreciation, for example.

The question is further complicated when money goes out for non-income items. Buying or selling fixed assets, for example. Another is loan payments.

The Statement of Cash Flows answers the Big Question this way.

It starts out with the Net Income from the Income Statement. Then there's a bunch of line items called "Operating Activities". These take care of most of those pesky accrual things.

Next is a group called "Investing Activities". As the title indicates, these are buying and selling stocks and bonds. It also includes buying and selling fixed assets, though this has always struck me as confusing.

Finally, there's "Financing Activities". A company can finance it's operations by issuing its own stock. It can also buy some of it back (Treasury Stock). More often, a company takes out a loan from the bank or someone else. These all go here.

Netting all these together gives you the net change in cash. Add into the mix the cash the company started the period out with and (Presto!) you've got the ending cash in the bank.

- Like magic, only like magic if you know the secret, the whole thing is logical.