TOPIC 5 CONT:

CASHFLOW STATEMENTS

A cash flow statement (CFS) is a financial statement that captures

how much cash is generated and utilized by a company or business
in a specific time period.
A cash flow statement organizes all of the various sources of income
and expenditures that a business has into an easy-to-understand
format. The cash flow statement shows how much money the
business is earning and how much money the business is spending
EXAMPLE

Cash, Beginning of Period:

$100,000

Cash Flow from Operating Activities

Additions

Net Income: $50,000

Subtractions

Accounts Receivable ($10,000)

Net Cash from Operating Activities:

$40,000

Cash Flow from Investing Activities

Additions

none
Subtractions

New Equipment: ($1,000)

Net Cash from Investing Activities: ($1,000)

Cash, End of Period:

$139,000

What Is Cash Flow From Operating Activities?

A company's cash flow is the amount of money that goes through it. This
includes anything that comes into and goes out of the company's coffers.
When cash flows are positive, it means that the company's assets are
increasing. When its outflows are higher than its inflows, the company's cash
flows are negative.

There are three types of cash flows: cash flow from investing, cash flow from
financing, and cash flow from operating activities. The cash flow from
operating activities section appears at the top of a company's cash flow
statement. It is used to explain where a company gets its cash from ongoing
regular business activities, such as sales and manufacturing, and how it uses
that capital during any given period of time.

The cash flow statement typically includes:

 Net income, which can be located from the income statement

 Adjustments to net income
 Changes in working capital

As such, you can calculate cash flow from operating activities using the
following formula:

Net Income + Adjustments to Net Income (non-cash items) + Changes in

Working Capital

Net Income
Net income is typically the first line item in the operating activities section of
the cash flow statement. This value, which measures a business's
profitability, is derived directly from the net income shown in the company's
income statement for the corresponding period.

The cash flow statement must then reconcile net income to net cash flows.
This is done by adding back non-cash expenses
like depreciation and amortization. Similar adjustments are made for non-
cash expenses or income such as share-based compensation or unrealized
gains from foreign currency translation.

Working Capital

The cash flow from operating activities section also reflects changes
in working capital. This figure represents the difference between a company's
current assets and its current liabilities.

A positive change in assets from one period to the next is recorded as a cash
outflow, while a positive change in liabilities is recorded as a cash inflow.
Inventories, accounts receivable (AR), tax assets, accrued revenue, and
deferred revenue are common examples of assets for which a change in
value is reflected in cash flow from operating activities.

Accounts payable, tax liabilities, and accrued expenses are common

examples of liabilities for which a change in value is reflected in cash flow
from operations.

Balance Sheet vs. Cash Flow Statement:

What's the Difference?
By
EVAN TARVER

Updated February 10, 2022

Reviewed by MARGARET JAMES

Fact checked by
SUZANNE KVILHAUG

Balance Sheet vs. Cash Flow Statement: An Overview

The balance sheet and cash flow statement are two of the three financial
statements that companies issue to report their financial performance. The
financial statements are used by investors, market analysts, and creditors to
evaluate a company's financial health and earnings potential. While the
balance sheet shows what a company owns and owes, the cash flow
statement records the cash activities for the period.

Balance Sheet
A balance sheet lists a company's assets, liabilities, and shareholders' equity
at a point in time, typically at the end of a period, such as the end of a quarter
or year. A balance sheet shows what a company owns in the form of assets,
what it owes in the form of liabilities, and the amount of money invested by
shareholders listed under shareholders' equity (also referred to as owners'
equity).

The balance sheet shows a company's assets, but also shows how those
assets were financed, whether it was through debt or through issuing equity.
The balance sheet is broken down into three parts: assets, liabilities, and
owners' equity, and it is represented by the following equation:

Assets=Liabilities+Owners’ Equitywhere:Owners’ Equity=Total Asse

ts minus total liabilitiesAssets=Liabilities+Owners’
Equitywhere:Owners’ Equity=Total Assets minus total liabilities
To calculate the balance sheet, one would add total assets to the sum of total
liabilities and shareholders' equity.

The balance sheet equation above must always be in balance. If cash is used
to pay down a company's debt, for example, the debt liability account is
reduced, and the cash asset account is reduced by the same amount,
keeping the balance sheet even. The name "balance sheet" is derived from
the way that the three major accounts eventually balance out and equal each
other; all assets are listed in one section, and their sum must equal the sum
of all liabilities and the shareholders' equity.

Below are examples of items listed on the balance sheet:

Assets
  Cash and cash equivalents are liquid assets, which may include
Treasury bills and certificates of deposit.
 Marketable securities are equity and debt securities.
 Accounts receivables are the amount of money owed to the company
by its customers for product and service sales.
 Inventory is either finished goods or raw materials.

Liabilities

 Debt including long-term debt

 Rent, taxes, utilities payable
 Wages payable
 Dividends payable

Shareholders' Equity

 Shareholders' equity is a company's total assets minus its total

liabilities. Shareholders' equity represents the net value or book value
of a company. It is the amount of money that would be returned to
shareholders if all of the assets were liquidated, and all of the
company's debt was paid off.
 Retained earnings are recorded under shareholders' equity and are the
amount of net earnings that were not paid to shareholders as dividends.
Instead, the money was retained to be reinvested in the business, or
pay down debt.

The balance sheet shows a snapshot of the assets and liabilities for the
period, but it does not show the company's activity during the period, such as
revenue, expenses, nor the amount of cash spent. The cash activities are
instead, recorded on the cash flow statement.

Cash Flow Statement

The cash flow statement shows the amount of cash and cash equivalents
entering and leaving a company.

The cash flow statement (CFS) measures how well a company manages and
generates cash to pay its debt obligations and fund operating expenses. The
cash flow statement is derived from the income statement by taking net
income and deducting or adding the cash from the company's activities
shown below.
The three sections of the cash flow statement are:

 Cash from operating activities

 Cash from investing activities
 Cash from financing activities

Operating Activities

Operating activities on the CFS include any sources and uses of cash from
business activities. In other words, it reflects how much cash is generated
from the sale of a company's products or services.

Changes made in cash, accounts receivable, inventory, and accounts

payable are shown in cash from operating activities and might include:

 Receipts from sales of goods and services

 Interest payments
 Income tax payments
 Payments made to suppliers
 Salaries and wages

Investing Activities

These activities include any incoming or outgoing cash from a company's

long-term investments. Investing activities include:

 A purchase or sale of an asset

 Loans made to vendors or received from customers
 Merger or acquisition payments or credits to cash

Financing Activities

These activities include cash from investors or banks, as well as the use of
cash to pay shareholders. Financing activities include:

 Payment of dividends, which are periodic cash payments to

shareholders
 Payments for stock repurchases, which reduces the number of
outstanding shares
 Repayment of debt principal (loans)
A balance sheet is a summary of the financial balances of a company, while a
cash flow statement shows how the changes in the balance sheet accounts–
and income on the income statement–affect a company's cash position. In
other words, a company's cash flow statement measures the flow of cash in
and out of a business, while a company's balance sheet measures its assets,
liabilities, and owners' equity.

statement of change in equity

A statement of change in equity (also referred to as statement of retained

earnings) is a business' financial statement that measures the changes in
owners’ equity throughout a specific accounting period. It covers the
following elements:

 Net profit or loss.

 Dividend payments.
 Equity withdrawals.
 Effect of accounting policies changes.
 Effects of prior accounting period corrections.
 Accumulated reserves and retained earnings

The general equation can be expressed as following: Ending Retained Earnings = Beginning
Retained Earnings − Dividends Paid + Net Income. This equation is necessary to use to find
the Profit Before Tax to use in the Cash Flow Statement under Operating Activities when using
the indirect method.

The purpose of a statement of changes in equity is to furnish shareholders with

information that can further inform their investment strategy. It can be used to
identify the par value of common or treasury stocks, clarify retained earnings and
strengthen investor trust in your company.

Formula
The formula for a statement of changes in equity includes the
opening and closing value of the equity, net income for the
year, dividends paid, and other changes.
 Opening Balance of Equity + Net Income – Dividends
+/- Other Changes = Closing Balance of Equity

 Opening Balance: It represents the value of equity capital

at the beginning of the reporting period, which is the same as
the prior period’s closing balance of equity.
 Net Income: It represents the net profit or loss reported in
the income statement during the period.
 Dividends: Dividends declared during the reporting period
should be subtracted from the equity balance as it represents
the distribution of wealth among shareholders.
 Other Changes include the following –
o Effects of Changes in Accounting Policies: Usually,
changes in accounting policies have to apply
retrospectively, which results in adjustments in the preceding
period and then restated financial position.
o Effects of Prior Period Correction: The effects of
other prior period adjustments should be captured
separately in the statement of changes in equity.
o Changes in Share Capital: Issuance (increase) and
withdrawal/ redemption (decrease) of share capital during
the period should be captured to show movement in equity
funding.
o Changes in Reserve Capital: It captures all gains and
losses recognized in the revaluation reserve during the
period.
 Closing Balance: It represents the value of equity capital at
the end of the reporting period.

Steps to Prepare Statement of

Changes in Equity
 Step #1 Firstly, determine the value of the equity at the
beginning of the reporting period, which is the same as the
 value at the end of the last reporting period. It is the opening
balance of equity
 Step #2 Next, determine the net income or loss booked by
the firm.
 Step #3 Next, determine the value of the dividend declared
by the management for the reporting period.
 Step #4 Next, determine all the adjustments for the
reporting period, which may include effects of changes in
accounting policies, correction of prior period errors, changes
in reserve capital, and share capital.
 Step #5 Finally, the closing balance of equity can be derived
by adding net income (step 2) to the opening balance of
equity (step 1), deducting dividends (step 3), and other
adjustments (step 4), as shown below.

Opening Balance of Equity + Net Income – Dividends

+/- Other Changes = Closing Balance of Equity

This primary purpose of Statement of Changes in Equity is to

provide details about all the movements in
the equity account during an accounting period, which is
otherwise not available anywhere else in the financial
statements. As such, it helps the shareholders and
investors make more informed decisions about their
investments. Further, it also allows the analysts and other
readers of the financial statements to understand what
factors resulted in the change in the equity capital.
EXAMPLES
Now, let us have a look at the annual report of Apple Inc.
for the year 2019 and see how the statement of changes in
equity is reported in real-life cases.