26
Apr
11

How to prepare a statement of cash flows

The statement of cash flows gives many accountants heartburn.  After spending years in school learning accrual accounting, it can be difficult to go back to thinking in terms of cash.  I want to provide you a worksheet and methodology I picked up along the way that helped me know how to prepare and balance a statement of cash flows.  I hope this is helpful in your work.

A little background on the statement:

The statement of cash flows presents cash receipts and payments for an organization during a given period of time.  It presents cash receipts and payments in three different categories:  operating, investing, and financing activities.  Noncash transactions must also be disclosed.  There are two options for preparing a statement of cash flows – the direct and the indirect method.  I’m going to focus on the indirect method here.  There are also a few special items non-profits should consider, and these are identified below.

The indirect method starts with the change in net assets and adjusts for (a) noncash items related to investing or financing activities such as depreciation and net realized and unrealized gains on investments, and (b) changes during the period in operating assets and liabilities.1

A statement of cash flows has five basic elements:1

Cash flows from operating activities

  • Cash flows from investing activities
  • Cash flows from financing activities
  • Net change in cash during the period
  • Supplemental disclosure of noncash investing and financing activities.

Here are examples of each type of activity:

Operating:

Investing:

Receipts of contributions Sale of property and equipment
Receipts of grants Sale or maturity of investments
Payment of wages Collections on loans
Payment of supplies Purchase of investments
   
   

Financing:

Noncash investing and financing:

Short-term borrowings Acquiring assets by capital lease
Interest and dividends restricted for long-term purposes Capitalization of donated services
Contributions restricted for long-term purposes Acquiring property and equipment through a loan
Repayments of amounts borrowed  

How to prepare an indirect statement of cash flows:

Because a cash flow statement takes net income (or change in net assets for a non-profit), and reconciles it to the change in cash, the difference between the two is basically the change in every other balance sheet item (I say “item” instead of “account”, because if you summarize accounts in groups on the balance sheet (Statement of Financial Position for non-profits), you can prepare the cash flow worksheet referenced below at this summarized level instead of at the detail level for each account).

First, identify typical statement of cash flow captions relevant for your organization and make sure systems are in place to track amounts for these captions.  For example, the change in net fixed assets typically comes from four activities: Depreciation, acquisition of new assets, and disposal of old assets, and sales of old assets.  Tracking these four activities will make it easy to allocate a years worth of net change in fixed assets on this schedule.  A typical fixed asset subledger system will track these separate activities.  If your organization does not use a fixed asset subledger system, these activities should be tracked separately in another system like excel.

Once you have your financial statements prepared and are ready to begin the statement of cash flows, the next step is to allocate the change from every balance sheet item to the various captions in the Statement of Cash Flow.  Here are the mechanics: 

  1. Use the excel template provided here (Cash flow worksheet) or create your own following these instructions.
  2. Include two years of balance sheet items and their balances across the top rows on your excel spreadsheet.  Have a separate row calculate the change in the two years for each balance sheet item.
  3. Identify what cash flow captions you need and place them down one column on the left.  The space to the right under the row of balance sheet items will be the “allocation section” where each balance sheet item is allocated to these cash flow captions.  If you’re just getting started, use your organization’s balance sheet items plus the common captions noted in the cash flow worksheet.
  4. Allocate out known activity for each balance sheet item to the various captions.  For example, report the amounts for depreciation expense and fixed asset acquisition under the Property, Plant and Equipment column at each of these captions.
  5. Include a “balancing” row at the bottom below the allocation section.  It should be the sum of the change less the amount already allocated to the cash flow captions.  Until the total “change” in each balance sheet item is allocated to the cash flow captions in the allocation section, there should be a balance here.  Any balance means there is more (or less) to be allocated among the captions.  Once a balance sheet item is fully allocated, the balancing row should become zero for that balance sheet item. 
  6. Research any amounts not fully allocated and determine where they should be reported.  There is a “plug” feature on this worksheet for some items because several balance sheet items are presented simply as a “change in operating assets and liabilities”. 

Special items for non-profits

There are several special items non-profits should be aware of.  This list isn’t exhaustive, but is meant to get you thinking about unique items which require a special presentation.  Please add comments below if you want to mention other special non-profit considerations for others reading this blog.

Endowments – Contributions to endowments or for other long-term purposes for which restrictions are not yet satisfied are considered financing activities instead of operating activities.   The statement of cash flow should reclass these contributions out of operating activities and into financing.

Noncash contributions – Noncash gifts, such as contributions of stock or notes receivable need to be reduced from operating activities because they are not cash provided by operating activities.

Collection items – Cash flows from purchases, sales and insurance recoveries of unrecognized, noncapitalized collection items shall be reported as investing activities (FASB ASC 958-230-55-5A) 

1 – PPC’s Guide to Nonprofit GAAP 2010.

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6 Responses to “How to prepare a statement of cash flows”


  1. September 12, 2011 at 12:54 pm

    very good to quick learn

  2. 2 Wamunang Joel
    March 21, 2012 at 10:43 am

    i want to knw what are the items to be included when preparing a cash flow statement

    • 3 Jennifer Brenner
      March 21, 2012 at 2:56 pm

      The statement of cash flows provides information about the changes in cash and cash equivalents of an entity for a reporting period, showing separately changes from operating activities, investing activities and financing activities.

  3. February 2, 2013 at 12:02 pm

    Does your blog have a contact page? I’m having a tough time locating it but, I’d like to shoot you an e-mail.

    I’ve got some ideas for your blog you might be interested in hearing. Either way, great blog and I look forward to seeing it expand over time.

  4. August 30, 2013 at 6:54 am

    Hi! Would you mind if I share your blog with my facebook group?
    There’s a lot of people that I think would really enjoy your content.
    Please let me know. Many thanks


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