The Cash Flow Statement is where we track cash coming into and going out of the business. Again, this is done for a specific period of time. To understand the Cash Flow Statement, we first need to introduce a few more finance terms.

Cash-based accounting

In cash-based accounting, all transactions are recorded when the cash is actually received or spent. You would include payments or received funds in the form of cash, check credit card payments, debit card payments, electronic transfers, or any other means of payment. For tracking cash-flow, this is the easier of the two accounting systems.

Accrual-based accounting

With accrual-based accounting, you record all transactions when they occur, even if no cash has changed hands. For example, if you were to sell something to a customer on store credit, you would give the customer the product immediately, but you wouldn’t receive payment for the item until they make it at a later date. This system is not good for tracking actual cash flow. For example, you could make thousands of rands of sales so that you have a great deal of money showing as revenue on your Income Statement, but you could have zero dollars in the bank! If your organization uses accrual-based accounting, creating the Cash Flow Statement is more complicated. It will require that you look at your Net Income and determine what portion of it was actually cash. Then you will have to add and sub out the changes in accounts that do not have an impact on cash, such as depreciation.

Depreciation

Considered a non-cash expense, depreciation is the reduction in value of an asset that occurs over time. Depreciation could be due from use, wear and tear, age, or irrelevance. For example, the computer you buy today will not be worth what you paid for it in five years. Instead, it will gradually depreciate until it either reaches the end of its life or it becomes completely useless for the operation of the business. Depreciation has to be included in financial statements as a cost in order to represent the true value of the organisation’s assets.

Cash Flow Categories

The Cash Flow Statement typically analyzes cash flow in three different categories:

• Operations
• Financing
• Investing

The table below demonstrates the main sources of incoming cash and the common uses for cash income.

Preparing the Cash Flow Statement

To prepare the Cash Flow Statement, you will need to look at the difference between the Balance Sheets from the beginning and the end of the accounting period. You will also need to look at the Net Income from the same period. The table below shows a sample of a Cash Flow Statement with a twist –the fourth column tells you where the information came from.

The amount given for the increase in cash is, at least partly, due to the conversion of accrual accounts into actual cash value.

At this point, you should be able to understand where the amounts in the financial statements come from and how to read the statements. You should also realize that it can take years to learn and fully understand accounting and bookkeeping processes. As you get more practice reading (and possibly creating) these statements, you will find it easier to do.