4.3: Statement of Cash Flows (SCF)
- Page ID
- 100407
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The last core final financial statement to discuss is the statement of cash flows. The purpose of this statement is to provide a means to assess the enterprise's capacity to generate cash and to enable stakeholders to compare cash flows of different entities (CPA Canada, 2016). This statement is an integral part of the financial statements for two reasons. First, this statement helps readers to understand where these cash flows in (out) originated during the current year, to assess a company's liquidity, solvency, and financial flexibility. Second, these historic cash flows in (out) can be used to predict future company performance.
The statement of cash flows can be prepared using two methods: the direct method and the indirect method. Both methods organize cash flows into three activities: operating, investing, and financing activities. The direct method reports cash flows from operating activities into categories such as cash from customers, cash to suppliers, and cash to employees. The indirect method reports cash flows from operating activities starting with net income/loss adjusted for any non-cash items, followed by the changes in each of the working capital accounts (i.e., current assets and current liabilities accounts). The total cash flows from the operating activities are the same for both methods. The investing and financing activities are prepared the same way under both methods.
This course will explain how to prepare the statement of cash flows using the indirect method. The direct method will be discussed in a subsequent intermediate accounting course.
Below is a statement of cash flows that illustrates the overall format and its connections with the income statement and SFP/BS.
Note that interest and dividends paid can also be reported in the operating activities section.
For the indirect method, the sum of the non-cash adjustments and changes to current assets and liabilities represents the total cash flow in (out) from operating activities. Any non-cash transactions relating to the investing or financing activities are excluded from the SCF but are disclosed in the notes. An example would be an exchange of property, plant, or equipment for common shares or a long-term note payable. The final section of the statement reconciles the net change from the three sections with the opening and closing cash and cash equivalents balances.