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BUSINESS BUILDER 4 HOW TO PREPARE A CASH FLOW STATEMENT zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business because it can be used to assess the timing, amount and predictability of future cash flows and it can be the basis for budgeting. A cash flow statement can answer the questions, “Where
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  BUSINESS BUILDER 4 HOW TO PREPARE A CASH FLOW STATEMENT  zions business resource center 2 What You Should Know Before Getting Started 3 ã What is a Cash Flow Statement? 3ã An Overview 4 Components of a Cash Flow Statement 5 ã Operating Activities 5ã Investing Activities 5ã Financing Activities 5ã Income Flows & Cash Flows 5 How to Prepare a Cash Flow Statement 6Constructing the Statement 10 ã Direct Method 10ã Indirect Method 11 How to Analyze a Cash Flow Statement 16 ã Cash Flow Statement Worksheet 17 Checklist 18Resources 18Notes 19 how to prepare a cash flow statement A cash flow statement is important to your business because it can be used to assess the timing, amount and predictability of future cash flows and it can be the basis for budgeting. A cash flow statement can answer the questions, “Where did the money come from?” and “Where did it go?”  how to prepare a cash flow statement3 This Business Builder will introduce you to the cash ow statement and its importance for nancial management. Through the use of a worksheet, the Business Builder will guide you through the construction of a cash ow statement for your business. The cash ow statement is a complex nancial statement and by necessity, this Business Builder contains information on sophisticated accounting topics. what you should know before getting started What is a Cash Flow Statement? For your business, the cash ow statement may be the most important nancial statement you prepare. It traces the ow of funds (or working capital) into and out of your business during an accounting period. For a small business, a cash ow statement should probably be prepared as frequently as possible. This means either monthly or quarterly. An annual statement is a must for any business. The cash ow statement’s primary purpose is to provide information regarding a company’s cash receipts and cash payments. The statement complements the income statement and balance sheet. It is important to note — cash ow is not the same as net income. Cash ow is the movement of money into and out of your company, and it can be affected by several noncash transactions. The cash ow statement became a requirement for publicly traded companies in 1987. There are various rules governing how information is reported on cash ow statements, as determined by generally accepted accounting principles (GAAP). While your business may not be a public company, a cash ow statement is still important to measure and track the ow of cash into and out of your business.This Business Builder is designed to show you how to create and understand your cash ow statement. Cash ow, simply, is the movement of money in and out of your business, or the inows and outows. This Business Builder assumes that a reliable accounting system is in place in your business and information typically recorded by small businesses is accessible to you. Therefore, you will need a balance sheet and prot and loss statement (or income statement) for your business for the same time period as the cash ow statement you will be preparing. The three statements work together to give you and others a clear picture of your business. You will learn what data is necessary to create a statement of cash ows for your business. what to expect The cash flow statement may be the most important nancial statement you prepare.  zions business resource center 4 The cash ow statement reports the cash provided and used by the operating, investing, and nancing activities of a company during an accounting period. In 1987, the Financial Accounting Standards Board issued Statement No. 95, which requires that a statement of cash ows accompany the income statement, balance sheet and statement of retained earnings. An Overview The cash ow statement explains the change during the period in cash and cash equivalents. Cash includes currency on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash. Statement No. 95 requires that cash receipts and payments be classied as operating, investing and nancing activities. The cash ow statement will summarize the cash ows so that net cash provided or used by each of the three types of activities is reported. Beginning and ending cash must be reconciled based on the net effect of these activities. Here is an example of what a cash ow statement might look like.The cash ow statement for the ABC Company shows there was a $205 cash shortfall in 200X. As can be seen from the cash ow statement, the cash drain is primarily from the investment of $400 in equipment. The statement also shows the cash ow from operations activity was a positive $165. Cash Flow From Operations  Net Income*   $200 Additions (Sources of cash)  Depreciation 100 Increase in Accounts Payable 30 Increases in Accrued Income Taxes 10 Subtractions (Uses of cash)  Increase in Accounts Receivable (150) Increase in Inventory (25)   Net Cash Flow From Operations   165   Cash Flows From Investing Activities  Equipment (400) Cash Flows Associated with Financing  Activities Notes Payable 30 Net Change in Cash (205) *Net income is taken from the income statement.  ABC Wholesale Company Cash Flow Statement  For the Year Ended 200X (In Thousands)
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