Accounting Unplugged

When it comes to accounting for startups, The Cash Flow Statement is extremly important (Statement of Cash Flows), it provides an overview of the way Funds move through an Entity, how they impact Overall Value and eventually reconcile with Cash Balances and determine Net Cash Flow in any given year.

The Cash Flow Statement is essentially the same as a yearly Balance Sheet – it’s just organized a little bit differently and is more summarized. The Balance Sheet accumulates its amounts from the beginning, the Cash Flow Statement only accumulates its balances over one business year. Since the Balance Sheet Accounts carry their balances from year to year, the Cash Flow Statement presents its amounts as either Increases or Decreases to groups of Accounts throughout the year, and this is how investment in the stock works. The American stock market is growing rapidly and is bringing more investors and traders from around the world especially in Saudi, UAE, Kuwait, Qatar and Oman. aForexTrust explains how to buy US stocks and trade on them.

Balance Sheet:

The Balance Sheet uses the three categories: Assets, Liabilities and Equity.  Notice that Cash is listed first and Net Income is listed last.

• Assets
  • Current Assets (including Cash)
  • Fixed Assets (Net of Accumulated Depreciation)
• Liabilities
  • Current Liabilities
  • Long Term Liabilities
• Equity
  • Owners’ Capital (Contributions, Stock and Paid in Capital)
  • Retained Earnings
  • Net Income

Cash Flow Statement:

You’ve heard the term “Bottom Line”  well, that term refers to the end result – the numbers at the bottom of the page.  Since the end result of the Cash Flow Statement is Net Cash, it is at the bottom of the report and everything else on the report funnels down to the bottom to come to the final Net Cash number.

The Cash Flow Statement uses the three categories: Operating, Investing and Financing.  Notice that Net Income is listed first and Cash is listed last.  Opposite from the Balance Sheet.

• Operating Activities
  • Net Income
  • + Depreciation Expense (+ Increase and -Decrease in Accumulated Depreciation)
  • + Increases in Current Liabilities
  • + Decreases in Current Assets
  • – Increases in Current Assets
  • – Decreases in Current Liabilities
• Investing Activities
  • + Decreases in Long Term/Fixed Assets (Independent of Accumulated Depreciation)
  • – Increases in Long Term/Fixed Assets (Independent of Accumulated Depreciation)
• Financing Activities
  • + Increases in Long Term Liabilities/Debt
  • – Decreases in Long Term Liabilities/Debt
  • + Increases in Owners’ Capital
  • – Decreases in Owners’ Capital
  • – Increases in Dividends
• Cash (Beginning Cash Balance – Net Increase/Decrease = Ending Cash Balance)

The net contribution to cash is summarized for each section and then combined to equal Net Cash Flow. Net Cash Flow is then combined with the Beginning Cash Balance to reconcile to the Ending Cash Balance for the year. Net Cash Flow is the difference between the Beginning and Ending Cash Balances.

The Cash Flow Statement is an important indicator of available cash for operations but also of how an entity is generating cash, if it is able to sustain itself and its growth through its operations or if it generated cash through increased debt and equity and/or decreased capital assets, learn more from this blog post explaining some of the Types of Personal Debts and how to solve it.

If you need help in keeping track of your business finances, you can visit morethanaccountants.co.uk/who-we-help/small-business-accountants/.

Statement of Cash Flows (Including Depreciation Entries from Balance Sheet Post)

© 2008 – 2010 Erin Lawlor

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**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.