Comparative Cash Flow Statement

A comparative cash flow statement is used to show changes in the cash balance of the company. This may help you ensure that your business has enough cash to continue its operations, make certain investments, or pay its taxes. Cash flow projections can be valuable documents to use when requesting loans or investments, since it provides quantitative support for your request. Banks and investors can see that your company faces cash shortages during certain periods and may be more willing to invest their funds. I have included the general instructions for specific line items below, which can also be found on the template. Feel free to modify, delete, add, and reformat the cash flow statement as you please.

General Instructions:

One of the main functions of the cash flow statement is to ensure the business does not run out of cash. Because cash reserves can fluctuate wildly based on business operations, it is usually forecasted on a monthly basis. This gives greater assurance that the business will not encounter cash shortages at some point during the year.

This template provides two seperate sheets: one for the direct method and one for the indirect method. These differing methods only affect the calculation of the Cash From Operating Activities section. Cash From Investing Activities and Cash From Financing Activities remain the same regardless of which method you use. Also, you should arrive at the same number regardless of which method you use. Under the direct method, cash from operating activities is calculated using individual cash receipts for each cash transaction. The indirect method calculates cash from operating activities by beginning with net income and adjusting for non-cash expenses (depreciation, amortization, etc.), changes in operating receivables and payables (especially accounts receivable, accounts payable, and inventory),  noncash gains and losses, and nonoperating items. In essence, you are beginning with net income and reconciling it to operating cash flow. While this may seem overwhelming, it will begin to make sense once we discuss the specific line items. Theoretically speaking, the direct method is superior because it produces a more detailed cash flow statement. However, in practice, the indirect method is preferred by most businesses because it is far easier to maintain; reconciles your cash flow statement to your income statement; and takes less time to prepare.

For the purposes of this template, in the operating activities and investing sections, when you see a line item with paranthesis around an event (decrease, increases, acquisition), it means that that event causes a cash outflow so the number entered into the cell for that event should be negative. For example, “Decreases (increase) in trade receivables.” If my business experienced a decrease in trade receiavables, the number I enter should be positive. If my business experienced an increase in trade receivables, the number I enter should be negative.

Note that the cash flow statement, like the income statement, is prepared to reflect what occured during a specific period, not as a snapshot of the accumulated amounts for every account, as is the case for the balance sheet. So, each line item, no matter which method you use, should reflect only the amount for the period, or in the case of changes in operating assets and liabilities, changes between periods.

For Indirect Method:

Net Income: this is the net income on the income statement for the period in which you are preparing the cash flow statement. You will see shortly that we need the balance sheet for the cash flow statement, too. That is why all line items on the income statement and balance sheet (except cash, of course) are prepared prior to the cash flow statement.

Adjustments to reconcile net income to net cash provided by (used in) operating activities: let us walk through each of the adjustments to reconcile net income to net cash used in operating activities, starting with those that do not have to do with operating assets and liabilities.

Depreciation and Amortization: these are allocations of the costs of using fixed assets (depreciation) and intangible assets (amortization). They appear as expenses on the income statement and reduce the business’s net income, but do not represent actual cash outflows. In reality, you probably paid all of the cash for the asset when you bought it, in which case it will appear in the investing section. Since depreciation and amortization are noncash expenses, we add them back to net income to get to operating cash flow because depreciation and amortiation never actually reduced our cash balance.

Provision for Bad Debt Expense: if your business creates a provision for when customers do not pay, you should add this back to net income because this is a noncash expense. I hope you are beginning to see a pattern here. NONCASH expenses get added back to net income to reflect the simple fact that cash never actually left the bank. If you are wondering whether or not an expense is a cash expense, ask yourself, “Who, if anyone, do I pay this amount to?” In this case, as with depreciation and amortization, you are not actually receiving a bill and paying anyone, so it is noncash.

Inventory Obsolescence Impairment: if you have inventory that becomes obscelete which you need to write off, add this amount back to net income. Again, this is a noncash expense. No cash is flowing out of the bank, so we add it back!

Loss (gain) on Disposal of Property and Equipment, Net: if you record a gain or loss when you sell property or equipment, calculate the net amount of the gain or loss. If you have $15,000 in gain and $10,000 in loss, you had a $5,000 net gain. If you had a net gain, subtract this amount from net income. Conversely, if you experienced a net loss, add this amount back. Gains and losses occur when the cash received for property or equipment were more or less than the net book value of the asset (Net Book Value= Original Cost of Asset – Any Impairments, Depreciation, or Amortization). The reason we have to adjust for this line item is because losses and gains on disposal or not operating activities; they are investing activities and are already captured by Disposal [Acquistion] of Property, Plant, and Equipment.

Example of gain on disposal of equipment: my business owns a printer that I bought for $5,000. I depreciated the printer for 2 years by $2,000 each year, resulting in $4,000 accumulated depreciation. The net book value after 2 years is Original Cost of Asset ($5,000) – Depreciation ($4,000) = $1,000. If I receive $1,500 by selling (disposing) the printer, I received $500 more than the net book value. This is a $500 gain on disposal of my printer, and should be reduced from net income to arrive at net cash for operating activities.

Changes in operating assets and liabilities: now, we get to the changes in operating assets and liabilities (AKA change in working capital). Here, we are generally only concerned with changes in current assets and liabilities, since noncurrent assets generally belong in investing activities and noncurrent liabilities generally belong in financing activities. This generally includes inventory, any receivable accounts (including business and customer accounts), as well as payable accounts (taxes, wages, interest). Now, I have already detailed whether or not an increase or decrease results in a cash outflow or inflow. For example, in Decrease (Increase) in Trade and Accounts Receivables, we see that the paranthesis around increase instructs us to subtract from net income if we discover an increase in accounts receivable between the last period and current period. However, I want to briefly explain why. If the amount of accounts receivable increases, my business has more cash tied up in receivable accounts. That is cash I cannot access, because my customers have not paid me yet. Therefore, this is a use of cash and should be subtracted from net income. On the other hand, if my payables increase, I am keeping more cash in the business. Perhaps I am waiting longer to pay suppliers. This is a source of cash, so it is added to net income. These relationships are why businesses try to get customers to pay them quicker, and why they try to delay their own payments to suppliers or other institutions. It’s all about cash flow!

For Direct Method:

Don’t overthink this section, these line items are exactly as they sound. The tricky part is finding each individual receipt for each line item and adding them up to get the total amount for the line item. If you are intent on using the direct method, experts recommend trying to keep very accurate cash records and introduce technology to automatically classify operating cash inflows and outflows.

Cash Received From Customers: all cash received from customers; cash inflow.

Cash Paid for Merchandise: if you operate a merchandising business, this is the total amount of cash paid for merchandise. If you operate a manufacturing business, this includes the cost of raw materials, cost of direct labor, and cost of manufacturing overhead. This is essentially your cost of goods sold, but in cash form.

Cash Paid for Wages and Other Operating Expenses: all cash paid for wages and other operating expenses (utilities, marketing, supplies expense, etc.). Be careful not to copy and paste these numbers from the income statement. We are strictly talking about cash paid, not expenses incurred. You need to find each receipt representing a cash outflow for these expenses and add them up to get this amount. This is a cash outflow and should be typed in as a negative number.

Cash Paid for Interest: these are actual interest payments made. This is not necessarily the amount of interest expense found on the income statement. Only include actual cash you have paid to the bank so far in interest payments.

Cash Paid for Taxes: this includes any cash that you have actually paid to the government (perhaps for quarterly tax payments). You may not have paid your annual taxes yet, in which case you will have to come back to this cash flow statement and add the amount that you end up paying. Remember, we are not estimating any payments here. If cash did not leave the bank, it does not appear here.

 For Both Methods:

Disposal [Acquistion] of Property, Plant, and Equipment: if you sold property, plan, or equipment, this is the amount you received in cash for that disposal. If you bought property, plan, or equipment, this is the amount of cash you paid for that acquisition. Hopefully, these amounts are easily tracable on invoices you have kept or on your bank statement, as they are usually larger amounts.

Notes Payable: if you were issued a promissory note as part of a financing arrangement, include how much cash you received here.

Proceeds From Debt: this is the amount of cash you received during the period from bank loans or any other from of debt.

Principal Repayments For Debt: these are the principal payments you made during the current period, generally for financing arrangements like bank loans. This is a cash outflow and should appear as a negative number. This does not include interest. Interest paid is considered an operating cash flow under US GAAP. In the indirect method, interest expense is included in net income, and the adjustment to actual cash paid for interest is represented by the change in Interest Payable. If this does not make sense, just know that it is already taken care of! In the direct method, Cash Paid for Interest accounts for interest paid.

Withdrawals/Dividends Paid: if you withdrew money from the business or paid dividends to investors, this is a cash outflow that should be typed in as a negative number.