cash flow statement problem solving

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How to Improve Your Small Business’s Cash Flow

Cash flow refers to the total amount of money flowing in and out of a business. Here's how to solve cash flow problems.

Table of Contents

As a small business owner, you often wear many hats when first launching your company, including that of chief financial officer. At the root of controlling your business’s finances, you need to understand how cash flows in and out daily, weekly and monthly. 

While managing your business’s finances entails much more than understanding your cash flow, it’s a great place to start assessing your business’s financial standings. Read on to learn about cash flow, including the seven most common cash flow problems small businesses experience and how best to solve them.

What is cash flow?

Cash flow refers to the intake and output of money within a business. It encompasses all the revenues and expenses of a company at a given moment in time. Cash flow management is planning your inflows and outflows accordingly to ensure your business always has cash reserves. The best accounting software can help business owners keep track of their cash flow and other financial metrics. [Learn more about accounting and cash flow management from a CEO.]     

What are common cash flow problems and how to solve them?

Poor cash flow management is one of the top reasons small businesses fail. Properly managing your cash flow takes time and energy, but it’s imperative to understand where and when your cash is coming in and how it’s leaving. As you monitor your finances, be aware of these seven common cash flow problems that can severely impact your business.

1. Late payments

Late payments are one of the leading causes of cash flow problems for small businesses. Small business owners typically operate with tight budgets and rely on receiving customer payments on time to pay bills and scale. Unfortunately, many clients pay late, some taking well over the standard 30 days to pay what they owe. Waiting over two months for payment can put your business in financial danger, especially when you rely on cash for growth. You may even need to spend time and money getting outside assistance to help with non-paying customers .

How to solve this problem: A great way to avoid late payments is to get up to speed on the best billing practices. Using cloud-based online invoicing software for all your billing needs is a good start. In addition, many online payment solutions provide invoicing tools to help customers pay you on time. These allow your business to accept multiple payment forms, follow up with clients and easily access your invoice records and reports. If you need help with your invoices, check out our review of FreshBooks , which is useful for creating and managing invoices.

2. Lack of profitability

Lack of profit is another common reason companies fail. Yet while there is a correlation between poor profitability and cash flow problems, financial issues can arise for businesses that are making a steady profit too. If your organization has high business expenses and you’re looking to reinvest profits, you need to be extra cognizant of cash flow issues. Plenty of companies have gone under, despite raising millions of dollars, owing to the simple fact that they were unable to generate steady cash.

How to solve this problem: The best method to avoid profitability issues is to always look for more profit-making opportunities that increase cash flow . These include developing new products or services, implementing product markups, doing consulting work and offering discounts and deals to increase traffic to your business.

>>Read About: Cash Flow Calculator

3. Withheld investment or funds

Locking in an investment or loan to fund your business is always great for capital. However, doing so has some rather severe contingencies. For example, an investor or bank can withhold a portion of your funds if you don’t meet expectations or your income is much less than you projected. This can cause cash flow issues if you rely on those funds to cover major expenses, such as replacing broken equipment or responding to an emergency situation.

How to solve this problem: The best way to avoid investors withholding funds is to give yourself breathing room. When you initially ask for a loan or seek an investment, ask for 25 percent more than “projected” as a line of credit. This way, you have extra cash available for an unforeseen emergency. [See our picks for the top business loan and financing options .]

FYI: A cash flow statement shows more than how much cash you have on hand. It also shows short-term investments, bank deposits and other assets. Learn how to prepare a cash flow statement to assess your business’s financial health.

4. Tax filing

Whether you’re a monthly, quarterly or annual tax filer, it’s your responsibility to file the correct amount of taxes on time. Tax filing itself isn’t a cash flow issue, but failing to file correctly or promptly can cause detrimental cash flow problems for your business, including interest payments, penalties and even an audit from the IRS. These consequences are expensive and take up valuable time.

How to solve this problem: The best way to avoid these issues is to stay ahead of tax deadlines and consult a tax specialist. Most business owners are busy enough as it is, so it’s a good idea to delegate tax work to a professional. A tax specialist can help you prepare and file your taxes on time and uncover potential tax deductions.

When tax time comes around, make sure you have enough cash in the bank to pay what you owe. While you may not know for sure the exact dollar amount you’ll need to pay ahead of time, you can build a basic model based on last year’s taxes versus your growth for the current year.

5. Undervalued products or services

As a business owner, you need to understand the value of your product or service and set your pricing accordingly. You might worry that raising prices will turn people away, but that isn’t necessarily true. Increasing the cost of your product or service also increases its perceived value, which could bring in more customers. Conversely, if your prices are too low, people may perceive your product as less valuable or of lower quality. However, setting your prices too high means you could lose out to competitors offering better rates.

How to solve this problem: To maximize your profit, find a happy medium. Set your prices high enough to increase your cash flow and establish your business as valuable, but not so high that you jeopardize potential sales. Conduct your own market research to help determine the best price points for your company and target audience.

6. Scope creep

“Scope creep” is when a project’s requirements unexpectedly change or increase over time. It’s an all-too-common phenomenon that isn’t necessarily bad, but you’ll want to be aware of it and manage it appropriately with clients. This can ensure you’re being compensated fairly for your work and prevent you from incurring additional costs that impact your cash flow.

How to solve this problem: Determine what is expected of you at the outset of any client project you undertake. If those expectations change, seek compensation for your time and associated costs. Failure to do so means you’re not only being paid less for the work you’ve completed, but your costs could also increase.

7. Use of old equipment

Old equipment not only takes up valuable space but is also inefficient. Constantly replacing equipment can be costly and frustrating, especially as technological advances render older product models obsolete. Outdated, poorly functioning equipment often means not getting the best bang for your buck, so to speak, and may subtract from your bottom line instead of adding to it.

How to solve this problem: Keeping up with the newest equipment will help your business run optimally. Leasing your devices can be a cost-effective method of ensuring you always have the latest and most efficient technology at your fingertips. In some cases, selling old equipment can also result in taxable gains.

Why is cash flow important?

Cash flow is important and essential because businesses cannot pay wages and bills on time without liquid capital. Not having enough cash on hand also means delaying any equipment purchases or new acquisitions. In some cases, a lack of liquid cash can lead businesses to expensive financing options that leave them in debt, increasing expenses in the form of debt service.

Having money in the bank is critical. A profitable but cash-poor business could ultimately run into significant issues that cut into profit margins or, worse yet, eclipse profitability altogether. Likewise, poor cash flow management leads to bigger issues for a business that, if left unaddressed, can rapidly snowball into a massive problem.

Managing cash flow can be stressful regardless of the size of your business. However, solving your cash flow issues doesn’t have to be complicated. You’re on the right track if you take the necessary precautions and remain educated on your specific cash flow needs. Keep the above-mentioned cash flow problems and their solutions in mind to help you avoid and mitigate such issues for your enterprise.

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Cash Flow Statement: Explanation and Example

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

February 28, 2024

This article is Tax Professional approved

A cash flow statement tells you how much cash is entering and leaving your business in a given period. Along with balance sheets and income statements, it’s one of the three most important financial statements for managing your small business accounting and making sure you have enough cash to keep operating.

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Cash flow statements are also required by certain financial reporting standards.

What makes a cash flow statement different from your balance sheet is that a balance sheet shows the assets and liabilities your business owns (assets) and owes (liabilities). The cash flow statement simply shows the inflows and outflows of cash from your business over a specific period of time, usually a month.

Let's take a closer look at what cash flow statements do for your business, and why they're so important. Then, we'll walk through an example cash flow statement, and show you how to create your own using a template.

First, let’s take a closer look at what cash flow statements do for your business, and why they’re so important. Then, we’ll walk through an example cash flow statement, and show you how to create your own using a template.

What is the purpose of a cash flow statement?

A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific period.

While income statements are excellent for showing you how much money you’ve spent and earned, they don’t necessarily tell you how much cash you have on hand for a specific period of time.

Cash flow statement vs. balance sheet

A balance sheet shows you your business’s assets, liabilities, and owner’s equity at a specific moment in time—typically at the end of a quarter or a year.

What it doesn’t show is revenue or expenses, or any of the business’s other cash activities that impact your company’s day-to-day health. Those activities are recorded on your cash flow statement.

Cash flow statement vs. income statement

Using only an income statement to track your cash flow can lead to serious problems—and here’s why.

If you use accrual basis accounting, income and expenses are recorded when they are earned or incurred—not when the money actually leaves or enters your bank accounts. (The cash accounting method only records money once you have it on hand. Learn more about the cash vs. accrual basis systems of accounting.)

So, even if you see income reported on your income statement, you may not have the cash from that income on hand. The cash flow statement makes adjustments to the information recorded on your income statement, so you see your net cash flow—the precise amount of cash you have on hand for that time period.

For example, depreciation is recorded as a monthly expense. However, you've already paid cash for the asset you're depreciating; you record it on a monthly basis in order to see how much it costs you to have the asset each month over the course of its useful life. But cash isn't literally leaving your bank account every month.

The cash flow statement takes that monthly expense and reverses it—so you see how much cash you have on hand in reality, not how much you've spent in theory.

Why do you need cash flow statements?

So long as you use accrual accounting, cash flow statements are an essential part of financial analysis for three reasons:

• They show your liquidity . That means you know exactly how much operating cash flow you have in case you need to use it. So you know what you can afford, and what you can’t.
• They show you changes in assets, liabilities, and equity in the forms of cash outflows, cash inflows, and cash being held. Those three categories are the core of your business accounting. Together, they form the accounting equation that lets you measure your performance.
• They let you predict future cash flows . You can use cash flow statements to create cash flow projections , so you can plan for how much liquidity your business will have in the future. That’s important for making long-term business plans.

On top of that, if you plan on securing a loan or line of credit, you’ll need up-to-date cash flow statements to apply.

Negative cash flow vs. positive cash flow

When your cash flow statement shows a negative number at the bottom, that means you lost cash during the accounting period—you have negative cash flow. It’s important to remember that long-term, negative cash flow isn’t always a bad thing. For example, early stage businesses need to track their burn rate as they try to become profitable.

When you have a positive number at the bottom of your statement, you’ve got positive cash flow for the month. Keep in mind, positive cash flow isn’t always a good thing in the long term. While it gives you more liquidity now, there are negative reasons you may have that money—for instance, by taking on a large loan to bail out your failing business. Positive cash flow isn’t always positive overall.

Where do cash flow statements come from?

If you do your own bookkeeping in Excel , you can calculate cash flow statements each month based on the information on your income statements and balance sheets. If you use accounting software , it can create cash flow statements based on the information you’ve already entered in the general ledger .

Keep in mind, with both those methods, your cash flow statement is only accurate so long as the rest of your bookkeeping is accurate too. The most surefire way to know how much working capital you have is to hire a bookkeeper . They’ll make sure everything adds up, so your cash flow statement always gives you an accurate picture of your company’s financial health.

Statements of cash flow using the direct and indirect methods

In order to figure out your company’s cash flow, you can take one of two routes: The direct method, and the indirect method. While generally accepted accounting principles (US GAAP) approve both, the indirect method is typically preferred by small businesses.

The direct method of calculating cash flow

Using the direct method, you keep a record of cash as it enters and leaves your business, then use that information at the end of the month to prepare a statement of cash flow.

The direct method takes more legwork and organization than the indirect method—you need to produce and track cash receipts for every cash transaction. For that reason, smaller businesses typically prefer the indirect method.

Also worth mentioning: Even if you record cash flows in real time with the direct method, you’ll also need to use the indirect method to reconcile your statement of cash flows with your income statement. So, you can usually expect the direct method to take longer than the indirect method.

The indirect method of calculating cash flow

With the indirect method, you look at the transactions recorded on your income statement, then reverse some of them in order to see your working capital. You’re selectively backtracking your income statement in order to eliminate transactions that don’t show the movement of cash.

Since it’s simpler than the direct method, many small businesses prefer this approach. Also, when using the indirect method, you do not have to go back and reconcile your statements with the direct method.

In our examples below, we’ll use the indirect method of calculating cash flow.

How the cash flow statement works with the income statement and the balance sheet

You use information from your income statement and your balance sheet to create your cash flow statement. The income statement lets you know how money entered and left your business, while the balance sheet shows how those transactions affect different accounts—like accounts receivable , inventory, and accounts payable .

So, the process of producing financial statements for your business goes:

Income Statement + Balance Sheet = Cash Flow Statement

Example of a cash flow statement

Now that we’ve got a sense of what a statement of cash flows does and, broadly, how it’s created, let’s check out an example.

There’s a fair amount to unpack here. But here’s what you need to know to get a rough idea of what this cash flow statement is doing.

• Red dollar amounts decrease cash. For instance, when we see ($30,000) next to “Increase in inventory,” it means inventory increased by $30,000 on the balance sheet. We bought $30,000 worth of inventory, so our cash balance decreased by that amount.
• Black dollar amounts increase cash. For example, when we see $20,000 next to “Depreciation,” that $20,000 is an expense on the income statement, but depreciation doesn’t actually decrease cash. So we add it back to net income.

You’ll also notice that the statement of cash flows is broken down into three sections—Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities. Let’s look at what each section of the cash flow statement does.

The three sections of a cash flow statement

These three activities sections of the statement of cash flows designate the different ways cash can enter and leave your business.

• Cash Flow from Operating Activities is cash earned or spent in the course of regular business activity—the main way your business makes money, by selling products or services.
• Cash Flow from Investing Activities is cash earned or spent from investments your company makes, such as purchasing equipment or investing in other companies.
• Cash Flow from Financing Activities is cash earned or spent in the course of financing your company with loans, lines of credit, or owner’s equity .

Using the cash flow statement example above, here’s a more detailed look at what each section does, and what it means for your business.

Cash Flow from Operating Activities

For most small businesses, Operating Activities will include most of your cash flow. That’s because operating activities are what you do to get revenue. If you run a pizza shop, it’s the cash you spend on ingredients and labor, and the cash you earn from selling pies. If you’re a registered massage therapist , Operating Activities is where you see your earned cash from giving massages, and the cash you spend on rent and utilities.

Cash Flow from Operating Activities in our example

Taking another look at this section, let’s break it down line by line.

Net income is the total income, after expenses, for the month. We get this from the income statement.

Depreciation is recorded as a $20,000 expense on the income statement. Here, it’s listed as income. Since no cash actually left our hands, we’re adding that $20,000 back to cash on hand.

Increase in Accounts Payable is recorded as a $10,000 expense on the income statement. That’s money we owe—in this case, let’s say it’s paying contractors to build a new goat pen. Since we owe the money, but haven’t actually paid it, we add that amount back to the cash on hand.

Increase in Accounts Receivable is recorded as a $20,000 growth in accounts receivable on the income statement. That’s money we’ve charged clients—but we haven’t actually been paid yet. Even though the money we’ve charged is an asset, it isn’t cold hard cash. So we deduct that $20,000 from cash on hand.

Increase in Inventory is recorded as a $30,000 growth in inventory on the balance sheet. That means we’ve paid $30,000 cash to get $30,000 worth of inventory. Inventory is an asset, but it isn’t cash—we can’t spend it. So we deduct the $30,000 from cash on hand.

Net Cash from Operating Activities , after we’ve made all the changes above, comes out to $40,000.

Meaning, even though our business earned $60,000 in October (as reported on our income statement), we only actually received $40,000 in cash from operating activities.

Cash Flow from Investing Activities

This section covers investments your company has made—by purchasing equipment, real estate, land, or easily liquidated financial products referred to as “cash equivalents.” When you spend cash on an investment, that cash gets converted to an asset of equal value.

If you buy a $10,000 mower for your landscaping company, you lose $10,000 cash and get a $10,000 mower. If you buy a $140,000 retail space, you lose $140,000 cash and get a $140,000 retail space.

Under Cash Flow from Investing Activities, we reverse those investments, removing the cash on hand. They have cash value, but they aren’t the same as cash—and the only asset we’re interested in, in this context, is currency.

For small businesses, Cash Flow from Investing Activities usually won’t make up the majority of cash flow for your company. But it still needs to be reconciled, since it affects your working capital.

Cash Flow from Investing Activities in our example

Purchase of Equipment is recorded as a new $5,000 asset on our income statement. It’s an asset, not cash—so, with ($5,000) on the cash flow statement, we deduct $5,000 from cash on hand.

Cash Flow from Financing Activities

This section covers revenue earned or assets spent on Financing Activities. When you pay off part of your loan or line of credit, money leaves your bank accounts. When you tap your line of credit, get a loan, or bring on a new investor, you receive cash in your accounts.

Cash Flow from Financing Activities in our example

Notes payable is recorded as a $7,500 liability on the balance sheet. Since we received proceeds from the loan, we record it as a $7,500 increase to cash on hand.

Cash flow for the month

At the bottom of our cash flow statement, we see our total cash flow for the month: $42,500.

Even though our net income listed at the top of the cash flow statement (and taken from our income statement) was $60,000, we only received $42,500.

That’s $42,500 we can spend right now, if need be. If we only looked at our net income, we might believe we had $60,000 cash on hand. In that case, we wouldn’t truly know what we had to work with—and we’d run the risk of overspending, budgeting incorrectly, or misrepresenting our liquidity to loan officers or business partners.

Using a cash flow statement template

Do your own bookkeeping using spreadsheets? In that case, using a cash flow statement template will save you time and energy.

Our Free Cash Flow Statement Template is easy to download and simple to use.

How to track cash flow using the indirect method

Four simple rules to remember as you create your cash flow statement:

• Transactions that show an increase in assets result in a decrease in cash flow.
• Transactions that show a decrease in assets result in an increase in cash flow.
• Transactions that show an increase in liabilities result in an increase in cash flow.
• Transactions that show a decrease in liabilities result in a decrease in cash flow.

If you’ve already gone through the example statement above and you feel like you have a pretty good grasp of how to create a cash flow statement, go ahead and start experimenting with our Free Income Statement Template and Free Cash Flow Template.

But if you’d like to get a clearer idea of how it all works, this quick example should help.

Creating a cash flow statement from your income statement and balance sheet

Let’s say we’re creating a cash flow statement for Greg’s Popsicle Stand for July 2019.

Our income statement looks like this:

Note: For the sake of simplicity, this example omits income tax.

And our balance sheet looks like this:

Remember the four rules for converting information from an income statement to a cash flow statement? Let’s use them to create our cash flow statement.

Our net income for the month on the income statement is $3,500 — that stays the same, since it’s a total amount, not a specific account.

Additions to Cash

• Depreciation is included in expenses for the month, but it didn’t actually impact cash, so we add that back to cash.
• Accounts payable increased by $5,500. That’s a liability on the balance sheet, but the cash wasn’t actually paid out for those expenses, so we add them back to cash as well.

Decreases to Cash

• Accounts receivable increased by $4,000. That’s an asset recorded on the balance sheet, but we didn’t actually receive the cash, so we remove it from cash on hand.

Our net cash flow from operating activities adds up to $5,500.

Greg purchased $5,000 of equipment during this accounting period, so he spent $5,000 of cash on investing activities.

Greg didn’t invest any additional money in the business, take out a new loan, or make cash payments towards any existing debt during this accounting period, so there are no cash flows from financing activities.

Cash Flow for Month Ending July 31, 2019 is $500, once we crunch all the numbers. Greg started the accounting period with $5,500 in cash. After accounting for all of the additions and subtractions to cash, he has $6,000 at the end of the period.

Cash flow statements are powerful financial reports, so long as they’re used in tandem with income statements and balance sheets. See how all three financial statements work together.

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How to Prepare Statement of Cash Flows in 7 Steps

How many times did you sit with the head in your hands worrying about the statement of cash flows? Lots of work, preparation, calculations, adjustments…. and damn it, figures just do not add up! It’s very frustrating and creates headaches. I’ve been there.

You might find making cash flow statements one of the most challenging issues no matter whether you use US GAAP (if you’re in the USA) or IFRS (if you are in one of more than 120 countries in the world applying IFRS). Many people also struggle with preparing IFRS statement cash flows because…

• It’s the only statement prepared on a cash basis, not on an accrual basis;
• Accounting records must be adjusted to exclude non-cash items which might be quite demanding.

But let’s be clear in one point: You still need a good method and resources to prepare statement of cash flows in line with IAS 7. I personally hated to prepare cash flows until I learned this simple method that I am going to show you.

UPDATE 2018: This article has already got a lot of attention and I’m grateful for this. Therefore, I published a video with step-by-step illustration of making cash flow statements. This video comes from my IFRS Kit , but if you’d like to watch it for free, please subscribe to my newsletter (by entering your e-mail address to the form on the right sidebar) and you’ll get it within my free IFRS mini-course. Enjoy!

Before Start

This method works only if you understand the following matters:

• You already know what the statement of cash flow is and what parts it has (operating, investing, financing and final reconciliation). You understand the basics of cash flows, relationship between individual components of financial statements (balance sheet, income statement and others), accounting etc. If that’s not the case, I sincerely recommend watching our online videos on these topics—in particular IAS 1: Presentation of Financial Statements and IAS 7: Statement of Cash Flows .

• Availability of various accounting information is generally good and you can easily access them. Sometimes you will need to do some adjustments resulting from supporting data and it would be lovely if you could get all pieces of info in the blink of an eye.
• You will stay cool, no nerves, no stress, just patience and concentration on this lovely work.

Ready? So let’s start. We are going to learn how to prepare statement of cash flows by indirect method.

Step 1: Prepare—Gather Basic Documents and Data

In order to start, you shall obtain at least the following documents:

• balance sheet (statement of financial position) as at the end of the current reporting period (closing B/S) and as at the beginning of the current reporting period (opening B/S)
• statement of comprehensive income (profit or loss statement + statement of other comprehensive income if applicable) for the current reporting period
• statement of changes in equity for the current reporting period
• statement of cash flows for the previous reporting period—well, you can proceed further without this, but it’s good source of potential recurring adjustments in the current period
• information about material transactions in your company during the current reporting period. Of course, you can adjust your statement of cash flows also for immaterial items, but it would not significantly change the information value of cash flow statement (since it’s immaterial, but careful about aggregation), so I would not bother about it

The first four bullets are crystal clear, but what sources of information about material transactions to use? Here is the short list of my ideas what to look for:

• major contracts that your company entered into during and before the end of the reporting period (lease, rental, hedging, construction—all sorts of)
• minutes or memoranda from the meetings of managing bodies in your company, like board of directors’ meetings, supervisory board meetings, shareholders’ meetings, audit committee meetings, etc.
• files from your legal department related to any proceedings against your company (and the opposite cases, too)
• documents from your investment/long-term assets department to look for major purchases, sales, exchanges and other transactions with fixed assets

That’s just a general shortlist and I am sure you know better what kind of transactions might be significant in your company—so go, ask and look for where you think it’s appropriate.

Step 2: Calculate Changes in the Balance Sheet

Now, take the closing and opening B/S and make a simple table with 3 columns: the first column – title of caption in B/S (for example, tangible non-current assets), the second column—balance of this caption from the closing B/S and the third column—balance of this caption from the opening B/S.

As you sure know, each B/S has 2 parts – assets and equity & liabilities. Ideally, totals of both parts should be the same, right? So when you do this simple table, please, enter assets with “+” sign and equity & liabilities with “-“ sign. Now do the check – if you entered the signs and numbers correctly, total of all assets and equity & liabilities should be 0 (don’t include subtotals).

In the 4 th column, calculate changes in the balance sheet over the current period. Use simple formula: opening B/S minus closing B/S (careful, not the vice versa!). When you calculate all the changes correctly, total of all changes will be 0 (again, don’t include subtotals). Just let me add that you can use your general ledger accounts instead of balance sheets and you will get greater details as balance sheet represent aggregated figures. It really depends on the level of details you need.

That was an easy bit, agree? But it’s very important to do it properly and not mix the signs and formulas. So you better check it again before moving further.

Step 3: Put Each Change in B/S to the Statement of Cash Flows

By now, you should have a blank statement of cash flows ready for further work. Ideally, you can use the statement of cash flows from previous period and take only titles of individual captions. Likely you will have the same items also in the current period cash flows. Anyway, you can always insert a line for some new items if necessary.

The rationale behind this step is that each change in the balance sheet has also some impact on the cash flow statement—and if not (when movement in balance sheet is fully a non-cash item), it will be adjusted for later.

So now you should look to all changes in your balance sheet and enter each number to the blank form of cash flow statement. For example, you have calculated that change in your property, plant and equipment is -10 000, so you enter this figure in the investing part of your blank cash flows under the title “purchases of PPE ” (as a change was minus 10 000, it means that the company spent the cash to purchase  PPE ).

You shall continue assigning each change in the balance sheet to the statement of cash flows until you finish all. When you are done, you should have a statement of cash flows with 2 columns—1 st column = titles of individual cash flow captions and 2 nd column = changes in the balance sheet assigned. Now perform a check—total of the 2 nd column shall be 0 (without subtotals). If it’s not, you have done something wrong, so go back and review.

Well, if you’d like to know precisely where to put individual changes and how it looks like, please watch our video IAS 7: Statement of Cash Flows —each step is explained very clearly in detail in Excel file with all numbers included.

Step 4: Make Adjustments for Non-cash Items from Statement of Total Comprehensive Income

By now, you have a solid base to finish your cash flows successfully. However, these figures do not mean anything. We have more work to do.

Take the profit or loss statement and statement of other comprehensive income. Then identify any numbers where non-cash transaction might have been recorded. Typical non-cash adjustments are usually as follows:

• depreciation expense
• interest income and expense
• income tax expense
• expense for recognition or income from derecognition of various provisions
• change in revaluation reserves
• foreign exchange differences at the end of period
• revaluation of certain assets and liabilities at the end of period
• barter transactions

and many more.

So once you identify non-cash transaction, just make adjustment in the blank statement of cash flows. Do each adjustment in the separate column. Making adjustments means simply adding one number to one caption and deducting it from the other one. It’s like doing double bookkeeping. The trick is to identify: 1) which captions in cash flows are impacted by non-cash item and 2) where is the plus side and where is the minus side.

For example, let’s take depreciation expense. On one side, it causes non-cash decrease in profit figure, so it should be added back. Just enter the figure in the operating part under the heading “adjustments for non-cash items: depreciation” with a plus sign. And where do we put the same figure with a minus sign? Well, depreciation artificially increased total payments for purchases of PPE . So we just deduct it from the investing part under the heading “purchases of PPE ”. Perform a check—total of adjustment shall be 0.

Go on until you are done with all identified non-cash adjustments from statement of total comprehensive income. And remember to verify your totals after each adjustment.

Now I know this is probably the most difficult part, because sometimes it’s hard to identify where to put the change and which sign to use. But the principle is always to do both sides of adjustment and keep your totals to be 0.

Again, let me remind you that our comprehensive step-by-step example included in IAS 7: Statement of Cash Flows video shows various types of non-cash adjustments and explains how to deal with them.

Step 5: Make Adjustments for Non-cash Items from Other Information

Step 5 is pretty much the same as step 4, but now you shall look to other information sources. I listed several of them in step 1.

So for example, you find out that your company entered into new material lease contract. And there is a non-cash adjustment hidden for sure, because on one side, increase in PPE was recorded that was not purchased for cash. On the other hand, increase in loans or lease liabilities was recorded, but the company have not received any cash. So you shall adjust for it, exactly the same way as described in the step 4. Remember about your total—it should be always 0.

You can continue this way until you review all information you consider relevant or necessary. I just remind to make each adjustment in the separate column and check your totals to be 0.

Step 6: Prepare Movements in Material Balance Sheet Items to Verify Completeness

Well, this step is really for diligent, hardworking and dutiful people. You can skip it if you want, but I recommend doing it from very obvious reasons: you will be pretty much sure that you have made all material non-cash adjustments in your cash flows without omitting something important. Well, if you are sure that you have all available information from various departments in your company to include, than fine. But if you are unsure about it, then rather do this step.

It’s very easy. Just take the biggest or material items in your balance sheet and reconcile their movements between opening and closing balance. Check whether each movement is taken into account for in your cash flow statement so far.

For example, PPE . You might find out that movement of PPE was as follows: closing balance (from closing B/S) = opening balance of PPE (from opening B/S) plus cash purchases of PPE plus lease acquisitions of PPE plus PPE received as a gift minus depreciation of PPE minus loss on sale of PPE minus cash sale of PPE . Which items from this movement are non-cash? I suggest the following ones: lease acquisitions of PPE , PPE received as a gift, depreciation and loss on sale of PPE . So for each of those non-cash items, you should have made an adjustment. Have you? Fine. Have you not? Well, that’s why you do the movements—you identified another necessary adjustment, so make it.

Step 7: Add Up and Perform Final Check

Let’s assume that by now you have done a lot of work, made a lot of adjustments, verified movements in material B/S items, your totals are always 0. Great job!

In this stage, finishing your cash flows is a piece of cake. What do you have in front of you? Huge excel file with 1 st column being the headings and titles of your statement of cash flows, 2 nd column being the changes in balance sheet and 3 rd –x th columns being individual adjustments.

Now it’s time to draw the last column. And you guessed it—your last column will be the statement of cash flows itself. In the individual lines or items from statement of cash flows, you shall make “horizontal” or “line” totals, or in other words, sum up the numbers from columns 2 to x. You effectively calculate the change in the balance sheet for the individual caption adjusted by non-cash items, that gives you the appropriate cash movement for that caption.

Fine. Then verify if it makes sense. For example, you will get certain number in the line “purchases of PPE ”—go and verify this number with your accounting records, or ask your investment department whether cash payments for PPE during the period were as you calculated. If not even close to that—you must have omitted something, or messed up signs or you made some other mistake.

Finally, look to “vertical” total of the last column—if it’s 0, you are the winner and deserve to sit back, close your eyes, relax…. but that’s topic for another article :-).

A Few Final Words…

Please bear in mind that my goal of this article was to draft a systematic approach for preparing a statement of cash flows rather than to explain the details of individual adjustments or other technical and factual issues. I just wanted to prove that it’s doable once you do it step by step.

You can see the video with this process here:

If you find it too difficult, or you do not understand all adjustments fully, or you need a clear demonstration, than I frankly encourage you to subscribe for our IAS 7: Statement of Cash Flows video course. You will not only learn about basics related to statement of cash flows, but also all above process is demonstrated very clearly in a comprehensive example and the most common cash flow adjustments are discussed.

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170 Comments

INTERESTED IN THE KIT

Hi , I am very thankful to cpdbox for knowledge support. I am searching how to deal with fixed received as gift in cash flow statement.

You know what i love you for this. Cash flow was my biggest hurdle to make FS and you make it a piece of cake for me now.

I can’t express how happy I am, I had come up with the same idea (double entry to make the non cash adjustments with zero balance) but I couldn’t find anyone to support me or help me to develop it, and I searched for a long time until I found your wonderful article. I’m grateful to you thank you very much Silvia.

Very pleased to read that! 🙂 Thanks

Dear Silvia, Kudos for the good work – you make it look so nice and easy 🙂 There are some old comments but unfortunately with no reply 🙁 Could you please elaborate on your method’s approach on Deferred tax assets/liabilities – I cannot figure out where to put the change in “Change in FP”, nor the double bookkeeping adjustment later so it makes sense in the end. It’s definitely a non-cash item and should not exist in CashFlow, but using this method is hard to acknowledge this change. Maybe this happens with other types of non-current assets/liabilities too. Thank you in advance!

Dear Adnrey, true, I do not reply all the comments since is it beyond my human capacity, although I am trying to give as much help as I can. To your DT question: Well, ask yourself – which accounts do you use when booking deferred tax? I bet it is the tax expense. So I would say you need to be careful with profit before tax figure. In most cases, the difference in DTA/DTL on balance sheet will be cleared against profit before tax figure. Similarly as with current income tax. In other words – where deferred tax is involved, you need to split taxes into 2 portions: current (cleared against paid current income taxes) and deferred (cleared against changes in balance sheet). Now, of course, there could be complications and you need to adjust accordingly.

Dear Silvia, thanks a lot for your answer! I am going to purchase the Kit with not a single drop of doubt into this decision. It is worth every penny, and I hope that you continue helping all of us, around the world!

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16.3 Prepare the Statement of Cash Flows Using the Indirect Method

The statement of cash flows is prepared by following these steps:

Step 1: Determine Net Cash Flows from Operating Activities

Using the indirect method , operating net cash flow is calculated as follows:

• Begin with net income from the income statement.
• Add back noncash expenses, such as depreciation, amortization, and depletion.
• Remove the effect of gains and/or losses from disposal of long-term assets, as cash from the disposal of long-term assets is shown under investing cash flows.
• Adjust for changes in current assets and liabilities to remove accruals from operating activities.

Step 2: Determine Net Cash Flows from Investing Activities

Investing net cash flow includes cash received and cash paid relating to long-term assets.

Step 3: Present Net Cash Flows from Financing Activities

Financing net cash flow includes cash received and cash paid relating to long-term liabilities and equity.

Step 4: Reconcile Total Net Cash Flows to Change in Cash Balance during the Period

To reconcile beginning and ending cash balances:

• The net cash flows from the first three steps are combined to be total net cash flow.
• The beginning cash balance is presented from the prior year balance sheet.
• Total net cash flow added to the beginning cash balance equals the ending cash balance.

Step 5: Present Noncash Investing and Financing Transactions

Transactions that do not affect cash but do affect long-term assets, long-term debt, and/or equity are disclosed, either as a notation at the bottom of the statement of cash flow, or in the notes to the financial statements.

The remainder of this section demonstrates preparation of the statement of cash flows of the company whose financial statements are shown in Figure 16.2 , Figure 16.3 , and Figure 16.4 .

Additional Information:

• Propensity Company sold land with an original cost of $10,000, for $14,800 cash.
• A new parcel of land was purchased for $20,000, in exchange for a note payable.
• Plant assets were purchased for $50,000 cash.
• Propensity declared and paid a $440 cash dividend to shareholders.
• Propensity issued common stock in exchange for $45,000 cash.
• Propensity issued $20,000 in common stock to employees as a bonus.

Prepare the Operating Activities Section of the Statement of Cash Flows Using the Indirect Method

In the following sections, specific entries are explained to demonstrate the items that support the preparation of the operating activities section of the Statement of Cash Flows (Indirect Method) for the Propensity Company example financial statements.

• Reverse the effect of gains and/or losses from investing activities.
• Adjust for changes in current assets and liabilities, to reflect how those changes impact cash in a way that is different than is reported in net income.0

Start with Net Income

The operating activities cash flow is based on the company’s net income, with adjustments for items that affect cash differently than they affect net income. The net income on the Propensity Company income statement for December 31, 2018, is $4,340. On Propensity’s statement of cash flows, this amount is shown in the Cash Flows from Operating Activities section as Net Income.

Add Back Noncash Expenses

Net income includes deductions for noncash expenses. To reconcile net income to cash flow from operating activities, these noncash items must be added back, because no cash was expended relating to that expense. The sole noncash expense on Propensity Company’s income statement, which must be added back , is the depreciation expense of $14,400. On Propensity’s statement of cash flows, this amount is shown in the Cash Flows from Operating Activities section as an adjustment to reconcile net income to net cash flow from operating activities.

Reverse the Effect of Gains and/or Losses

Gains and/or losses on the disposal of long-term assets are included in the calculation of net income, but cash obtained from disposing of long-term assets is a cash flow from an investing activity. Because the disposition gain or loss is not related to normal operations, the adjustment needed to arrive at cash flow from operating activities is a reversal of any gains or losses that are included in the net income total. A gain is subtracted from net income and a loss is added to net income to reconcile to cash from operating activities. Propensity’s income statement for the year 2018 includes a gain on sale of land, in the amount of $4,800, so a reversal is accomplished by subtracting the gain from net income. On Propensity’s statement of cash flows, this amount is shown in the Cash Flows from Operating Activities section as Gain on Sale of Plant Assets.

Adjust for Changes in Current Assets and Liabilities

Because the Balance Sheet and Income Statement reflect the accrual basis of accounting, whereas the statement of cash flows considers the incoming and outgoing cash transactions, there are continual differences between (1) cash collected and paid and (2) reported revenue and expense on these statements. Changes in the various current assets and liabilities can be determined from analysis of the company’s comparative balance sheet, which lists the current period and previous period balances for all assets and liabilities. The following four possibilities offer explanations of the type of difference that might arise, and demonstrate examples from Propensity Company’s statement of cash flows, which represent typical differences that arise relating to these current assets and liabilities.

Increase in Noncash Current Assets

Increases in current assets indicate a decrease in cash, because either (1) cash was paid to generate another current asset, such as inventory, or (2) revenue was accrued, but not yet collected, such as accounts receivable. In the first scenario, the use of cash to increase the current assets is not reflected in the net income reported on the income statement. In the second scenario, revenue is included in the net income on the income statement, but the cash has not been received by the end of the period. In both cases, current assets increased and net income was reported on the income statement greater than the actual net cash impact from the related operating activities. To reconcile net income to cash flow from operating activities, subtract increases in current assets.

Propensity Company had two instances of increases in current assets. One was an increase of $700 in prepaid insurance, and the other was an increase of $2,500 in inventory. In both cases, the increases can be explained as additional cash that was spent, but which was not reflected in the expenses reported on the income statement.

Decrease in Noncash Current Assets

Decreases in current assets indicate lower net income compared to cash flows from (1) prepaid assets and (2) accrued revenues. For decreases in prepaid assets, using up these assets shifts these costs that were recorded as assets over to current period expenses that then reduce net income for the period. Cash was paid to obtain the prepaid asset in a prior period. Thus, cash from operating activities must be increased to reflect the fact that these expenses reduced net income on the income statement, but cash was not paid this period. Secondarily, decreases in accrued revenue accounts indicates that cash was collected in the current period but was recorded as revenue on a previous period’s income statement. In both scenarios, the net income reported on the income statement was lower than the actual net cash effect of the transactions. To reconcile net income to cash flow from operating activities, add decreases in current assets.

Propensity Company had a decrease of $4,500 in accounts receivable during the period, which normally results only when customers pay the balance, they owe the company at a faster rate than they charge new account balances. Thus, the decrease in receivable identifies that more cash was collected than was reported as revenue on the income statement. Thus, an addback is necessary to calculate the cash flow from operating activities.

Current Operating Liability Increase

Increases in current liabilities indicate an increase in cash, since these liabilities generally represent (1) expenses that have been accrued, but not yet paid, or (2) deferred revenues that have been collected, but not yet recorded as revenue. In the case of accrued expenses, costs have been reported as expenses on the income statement, whereas the deferred revenues would arise when cash was collected in advance, but the revenue was not yet earned, so the payment would not be reflected on the income statement. In both cases, these increases in current liabilities signify cash collections that exceed net income from related activities. To reconcile net income to cash flow from operating activities, add increases in current liabilities.

Propensity Company had an increase in the current operating liability for salaries payable, in the amount of $400. The payable arises, or increases, when an expense is recorded but the balance due is not paid at that time. An increase in salaries payable therefore reflects the fact that salaries expenses on the income statement are greater than the cash outgo relating to that expense. This means that net cash flow from operating is greater than the reported net income, regarding this cost.

Current Operating Liability Decrease

Decreases in current liabilities indicate a decrease in cash relating to (1) accrued expenses, or (2) deferred revenues. In the first instance, cash would have been expended to accomplish a decrease in liabilities arising from accrued expenses, yet these cash payments would not be reflected in the net income on the income statement. In the second instance, a decrease in deferred revenue means that some revenue would have been reported on the income statement that was collected in a previous period. As a result, cash flows from operating activities must be decreased by any reduction in current liabilities, to account for (1) cash payments to creditors that are higher than the expense amounts on the income statement, or (2) amounts collected that are lower than the amounts reflected as income on the income statement. To reconcile net income to cash flow from operating activities, subtract decreases in current liabilities.

Propensity Company had a decrease of $1,800 in the current operating liability for accounts payable. The fact that the payable decreased indicates that Propensity paid enough payments during the period to keep up with new charges, and also to pay down on amounts payable from previous periods. Therefore, the company had to have paid more in cash payments than the amounts shown as expense on the Income Statements, which means net cash flow from operating activities is lower than the related net income.

Analysis of Change in Cash

Although the net income reported on the income statement is an important tool for evaluating the success of the company’s efforts for the current period and their viability for future periods, the practical effectiveness of management is not adequately revealed by the net income alone. The net cash flows from operating activities adds this essential facet of information to the analysis, by illuminating whether the company’s operating cash sources were adequate to cover their operating cash uses. When combined with the cash flows produced by investing and financing activities, the operating activity cash flow indicates the feasibility of continuance and advancement of company plans.

Determining Net Cash Flow from Operating Activities (Indirect Method)

Net cash flow from operating activities is the net income of the company, adjusted to reflect the cash impact of operating activities. Positive net cash flow generally indicates adequate cash flow margins exist to provide continuity or ensure survival of the company. The magnitude of the net cash flow, if large, suggests a comfortable cash flow cushion, while a smaller net cash flow would signify an uneasy comfort cash flow zone. When a company’s net cash flow from operations reflects a substantial negative value, this indicates that the company’s operations are not supporting themselves and could be a warning sign of possible impending doom for the company. Alternatively, a small negative cash flow from operating might serve as an early warning that allows management to make needed corrections, to ensure that cash sources are increased to amounts in excess of cash uses, for future periods.

For Propensity Company, beginning with net income of $4,340, and reflecting adjustments of $9,500, delivers a net cash flow from operating activities of $13,840.

Cash Flow from Operating Activities

Assume you own a specialty bakery that makes gourmet cupcakes. Excerpts from your company’s financial statements are shown.

How much cash flow from operating activities did your company generate?

Think It Through

Explaining changes in cash balance.

Assume that you are the chief financial officer of a company that provides accounting services to small businesses. You are called upon by the board of directors to explain why your cash balance did not increase much from the beginning of 2018 until the end of 2018, since the company produced a reasonably strong profit for the year, with a net income of $88,000. Further assume that there were no investing or financing transactions, and no depreciation expense for 2018. What is your response? Provide the calculations to back up your answer.

Prepare the Investing and Financing Activities Sections of the Statement of Cash Flows

Preparation of the investing and financing sections of the statement of cash flows is an identical process for both the direct and indirect methods, since only the technique used to arrive at net cash flow from operating activities is affected by the choice of the direct or indirect approach. The following sections discuss specifics regarding preparation of these two nonoperating sections, as well as notations about disclosure of long-term noncash investing and/or financing activities. Changes in the various long-term assets, long-term liabilities, and equity can be determined from analysis of the company’s comparative balance sheet, which lists the current period and previous period balances for all assets and liabilities.

Investing Activities

Cash flows from investing activities always relate to long-term asset transactions and may involve increases or decreases in cash relating to these transactions. The most common of these activities involve purchase or sale of property, plant, and equipment, but other activities, such as those involving investment assets and notes receivable, also represent cash flows from investing. Changes in long-term assets for the period can be identified in the Noncurrent Assets section of the company’s comparative balance sheet, combined with any related gain or loss that is included on the income statement.

In the Propensity Company example, the investing section included two transactions involving long-term assets, one of which increased cash, while the other one decreased cash, for a total net cash flow from investing of ($25,200). Analysis of Propensity Company’s comparative balance sheet revealed changes in land and plant assets. Further investigation identified that the change in long-term assets arose from three transactions:

• Investing activity: A tract of land that had an original cost of $10,000 was sold for $14,800.
• Investing activity: Plant assets were purchased, for $60,000 cash.
• Noncash investing and financing activity: A new parcel of land was acquired, in exchange for a $20,000 note payable.

Details relating to the treatment of each of these transactions are provided in the following sections.

Investing Activities Leading to an Increase in Cash

Increases in net cash flow from investing usually arise from the sale of long-term assets. The cash impact is the cash proceeds received from the transaction, which is not the same amount as the gain or loss that is reported on the income statement. Gain or loss is computed by subtracting the asset’s net book value from the cash proceeds. Net book value is the asset’s original cost, less any related accumulated depreciation. Propensity Company sold land, which was carried on the balance sheet at a net book value of $10,000, representing the original purchase price of the land, in exchange for a cash payment of $14,800. The data set explained these net book value and cash proceeds facts for Propensity Company. However, had these facts not been stipulated in the data set, the cash proceeds could have been determined by adding the reported $4,800 gain on the sale to the $10,000 net book value of the asset given up, to arrive at cash proceeds from the sale.

Investing Activities Leading to a Decrease in Cash

Decreases in net cash flow from investing normally occur when long-term assets are purchased using cash. For example, in the Propensity Company example, there was a decrease in cash for the period relating to a simple purchase of new plant assets, in the amount of $60,000.

Financing Activities

Cash flows from financing activities always relate to either long-term debt or equity transactions and may involve increases or decreases in cash relating to these transactions. Stockholders’ equity transactions, like stock issuance, dividend payments, and treasury stock buybacks are very common financing activities. Debt transactions, such as issuance of bonds payable or notes payable, and the related principal payback of them, are also frequent financing events. Changes in long-term liabilities and equity for the period can be identified in the Noncurrent Liabilities section and the Stockholders’ Equity section of the company’s Comparative Balance Sheet, and in the retained earnings statement.

In the Propensity Company example, the financing section included three transactions. One long-term debt transaction decreased cash. Two transactions related to equity, one of which increased cash, while the other one decreased cash, for a total net cash flow from financing of $34,560. Analysis of Propensity Company’s Comparative Balance Sheet revealed changes in notes payable and common stock, while the retained earnings statement indicated that dividends were distributed to stockholders. Further investigation identified that the change in long-term liabilities and equity arose from three transactions:

• Financing activity: Borrowed an additional $10,000 on notes payable.
• Financing activity: New shares of common stock were issued, in the amount of $45,000. (Note the $20,000 in common stock issued for employee bonuses is not a cash flow transaction.)
• Financing activity: Dividends of $440 were paid to shareholders.

Specifics about each of these three transactions are provided in the following sections.

Financing Activities Leading to an Increase in Cash

Increases in net cash flow from financing usually arise when the company issues share of stock, bonds, or notes payable to raise capital for cash flow. Propensity Company had two examples of an increase in cash flows, one from the issuance of common stock, and one from increased borrowing through notes payable.

Financing Activities Leading to a Decrease in Cash

Decreases in net cash flow from financing normally occur when (1) long-term liabilities, such as notes payable or bonds payable are repaid, (2) when the company reacquires some of its own stock (treasury stock), or (3) when the company pays dividends to shareholders. In the case of Propensity Company, the decreases in cash resulted from notes payable principal repayments and cash dividend payments.

Noncash Investing and Financing Activities

Sometimes transactions can be very important to the company, yet not involve any initial change to cash. Disclosure of these noncash investing and financing transactions can be included in the notes to the financial statements, or as a notation at the bottom of the statement of cash flows, after the entire statement has been completed. These noncash activities usually involve one of the following scenarios:

• exchanges of long-term assets for long-term liabilities or equity, or
• exchanges of long-term liabilities for equity.

Propensity Company had a noncash investing and financing activity, involving the purchase of land (investing activity) in exchange for a $20,000 note payable (financing activity).

Summary of Investing and Financing Transactions on the Cash Flow Statement

Investing and financing transactions are critical activities of business, and they often represent significant amounts of company equity, either as sources or uses of cash. Common activities that must be reported as investing activities are purchases of land, equipment, stocks, and bonds, while financing activities normally relate to the company’s funding sources, namely, creditors and investors. These financing activities could include transactions such as borrowing or repaying notes payable, issuing or retiring bonds payable, or issuing stock or reacquiring treasury stock, to name a few instances.

Cash Flow from Investing Activities

Assume your specialty bakery makes gourmet cupcakes and has been operating out of rented facilities in the past. You owned a piece of land that you had planned to someday use to build a sales storefront. This year your company decided to sell the land and instead buy a building, resulting in the following transactions.

What are the cash flows from investing activities relating to these transactions?

Note: Interest earned on investments is an operating activity.

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Financing | How To

7 Ways to Solve Cash Flow Problems

Published November 13, 2023

Published Nov 13, 2023

WRITTEN BY: Andrew Wan

This article is part of a larger series on Business Financing .

• 1. Determine the Impact
• 2. Determine the Amount & Source
• 3. Reduce Unnecessary Expenses
• 4. Encourage Faster Payment of Income
• 5. Negotiate Terms on Business Debts

6. Build an Emergency Fund

7. get additional funding, bottom line.

If you run your own company and are looking for ways on how to solve cash flow problems, this guide contains recommendations for how to identify and fix these issues. Some solutions include negotiating terms with vendors, reducing unnecessary expenses, and getting additional funding from loans and other sources.

Bluevine, for instance, is a lender we recommend if you want to get additional funding. It issues a small business line of credit that you can use to cover cash flow shortages. You can get up to $250,000 in funding in as little as 24 hours.

Visit Bluevine

1. Determine the Impact of Your Cash Flow Shortage

Identify the impact to your business finances and credit.

Shortages in cash flow can impact both your business revenue and expenses. Revenue, for instance, can be negatively impacted if you are unable to restock inventory. Without sufficient levels of inventory, you could see your sales drop.

Your business expenses can also be affected. For example, if a cash flow shortage results in the inability to pay business debts, you may be charged additional late fees. Depending on the timing of your payment, your business credit may also be negatively impacted, something that can result in lenders charging you higher rates and fees for loans.

Figure out the frequency and amount of the cash flow shortage

Determining how much and how frequently you’re typically short on funds is another thing that can help you determine how quickly you may need to look at your business cash flow problems.

For example, if you’re only short on funds several months throughout the year, you may just need to reallocate your funds from your higher-earning months to account for the seasonality of your product or service. Meanwhile, if you have a shortage regularly, you may need to take a more detailed look at your business income and expenses.

2. Determine the Amount and Source of the Cash Flow Shortage

Identify when you receive funds from income sources.

Income sources can include revenue you earn from sales and funds received from third-party vendors. This can include accounts receivables and sales you have made and issued invoices on but have not yet received payment for, or an outstanding invoice .

An important item to note, however, is that while some items may be recorded as income, you should consider when you receive the funds for purposes of determining the source of your cash flow shortage. This can help you later identify if you need to adjust the terms of your invoices to encourage faster repayment or make other arrangements such as getting funding from something like invoice financing to cover temporary cash flow shortages.

Create a list of when you must pay business expenses

Business expenses can include things like payroll expenses, loan payments, lease payments, inventory costs, and landscaping. To get a list of all expenses more easily, you can review your business bank statements to identify outflow of funds.

We recommend reviewing at least the past 12 months to capture as many expenses as possible as some of the costs associated with running a company may not be charged on a monthly basis. Insurance premiums, for instance, might only be paid on an annual basis.

3. Reduce Unnecessary Business Expenses

Cutting down on business expenses can be an easy solution to solving cash flow problems. You can use our worksheet on common IRS business expenses as a start. Be careful, however, not to eliminate an item that helps generate revenue or sales. You can do this by analyzing the return on investment (ROI) you’re getting from things you’re paying for.

Some examples of expenses you can consider eliminating or reducing can include:

• Landscaping and pest control
• Loan payments for business equipment
• Leasing expenses for office space
• Fees you’re paying for business software
• Fees for phone, computer support, and internet

If you’re unable to eliminate certain expenses, check if there are any cheaper alternatives with other providers. You can also consider reducing the frequency at which you have certain services performed. Finally, refinancing loans can also help by lowering monthly payments and reducing your interest rate.

4. Encourage Faster Repayment of Income

Provide volume discounts.

If you need funds quickly, providing a volume discount on orders can encourage customers to buy more than what they may initially need. This can provide your company with a much-needed infusion of funds while also allowing your clients to save money in the long run. This is something that can also lead to a more loyal customer base, which can yield additional long-term profits for your business.

Offer discounted prices for repeat customers

To encourage a more stable and consistent source of revenue, you can offer discounts to repeat customers. Discounts can be issued based on the number of orders placed in a specified time frame, or the dollar amount of orders placed. Depending on your company’s product or service, you can also consider offering discounts for customers who agree to sign a contract for a minimum period of time.

Allow discounts for automatic payments

Offering your clients an incentive for automatic payments can ensure not only more consistency as far as when you’ll receive payment, but it can also reduce the likelihood of your customers being delinquent.

Accept more methods of payment

If your business accepts more forms of payment, it can make it easier for customers to send you funds. Forms of payment you can consider accepting can include the following:

• Credit cards (American Express, Discover, Visa, and Mastercard)
• Peer-to-peer (P2P) payment methods, such as Venmo or PayPal
• Online payments
• Wire transfers

Some forms of payment assess fees, so you’ll want to make sure that the costs you incur from accepting additional forms of payment provide a sufficiently high ROI to justify the added expenses.

Provide discounts for paying with cash

To avoid the fees associated with accepting certain payment methods, you can encourage customers to pay with cash by offering a discount. Check out our guide on cash discounting for more details on how it works and what federal regulations you might need to be aware of.

Offer early payment discounts & discourage late payments

Offering an early payment discount can encourage customers to pay you more quickly. Be careful to not issue so large of a discount that it cuts into your net profit by too much. In addition to offering early payment discounts, charging late fees can give customers another incentive to pay invoices in a timely manner.

When considering how much to charge for late fees, don’t forget to consider any state or federal regulations that may limit the amount that can be charged. Charging too much may land you in trouble from a compliance perspective, something that can lead to additional fines and penalties.

5. Negotiate Payment Terms on Business Debts

Ask for extended payment terms.

If any of your vendors or suppliers offer you a grace period, you can ask them for more time to make payment in full without incurring any penalties. Some vendors require payment that is due on receipt, but you can ask for terms as long as 30 to 90 or more days to allow your business more time to hold onto funds.

Request discounted pricing

Just like you can offer discounted pricing to customers as a way to encourage faster repayment, you can do the same with your suppliers. For example, you can request discounts for being a long-time customer, being a repeat customer, or making payments in an alternative manner.

Refinance debt to a lower interest rate or longer term

When you refinance debt, you often can choose a lower rate and a different loan term. A lower interest rate can reduce the interest charges you pay over the life of the loan, while a longer loan term can reduce your total monthly payments by spreading the cost over a longer period.

If you decide to refinance debt, don’t forget to account for any origination fees or costs associated with getting a new loan. Also consider the possibility that while a refinance may help in the short term with your cash flow, it could be detrimental in the long run—depending on the total interest charges and loan fees you’ll be paying.

You can adjust the size of your emergency fund based on the frequency and dollar amount you typically fall short. At a minimum, we recommend having enough reserves to cover at least six months of operating expenses.

Get short-term loans for working capital

Short-term business loans typically allow funds to be used for a wide variety of business purposes. Some examples include payroll, inventory, rent, utilities, and other daily expenses. Short-term loans can often be issued in as little as one business day, but in exchange, they often carry higher interest rates compared to traditional loans. They also have a short repayment term, usually between several months to three years.

If you want to get a working capital loan, we recommend National Funding, which provides excellent customer service and customized loan options with up to $400,000 in funding. Depending on your business qualifications and loan details, you could also qualify for same-day funding.

Visit National Funding

Use a small business line of credit

A small business line of credit gives you the ability to draw funds on an as-needed basis. It’s a revolving credit line that allows you to draw funds up to the maximum credit limit you’re given, with interest charges only being applied to your outstanding balance. Just like with short-term loans, many small business line of credit providers allow funds to be used for any business purpose.

Bluevine is a lender we recommend for a small business line of credit. It offers up to $250,000 in funding and repayment terms as long as 12 months. You can also get funded in as little as 24 hours.

Apply for a small business credit card

With a business credit card, you’ll have a revolving line of credit you can use to make business-related purchases. It is ideal for small or medium expenses, recurring costs, and daily purchases.

Business credit cards give you the option to pay only a small portion of your outstanding balance, although the annual percentage rate (APR) is typically above 20%. As a result, it’s best to pay off the balance in full or within several months if you want to reduce the interest charges.

Many business credit cards also have a rewards program offering cash back or points that can be redeemed for merchandise or travel rewards. We recommend considering the U.S Bank Business Triple Cash Rewards World Elite Mastercard ® . It can offer up to 5% cash back on eligible purchases and is currently also offering a 0% intro APR on purchases and balance transfer for 15 billing cycles.

Apply for personal loans for business purposes

If your business credit is not good enough to get a business loan, personal loans for business purposes can be a good alternative. These loans focus on your personal credit as part of the qualification process. Personal loans can include lines of credit, term loans, and secured loans, such as home equity loans and home equity lines of credit.

If you’re looking for a personal loan for business purposes, consider checking out Upstart. It tops our list of the best personal loans for business funding , offering up to $50,000 in funding in as little as 24 hours.

Visit Upstart

Access your retirement savings with a rollover for business startups (ROBS)

With a ROBS , you have the ability to access your retirement funds tax- and penalty-free. A ROBS is not a loan, so it’s easier to get as it does not have many of the small business loan requirements commonly associated with a typical loan such as a minimum credit score, time in business, or revenue. Rather, one of the few requirements to get a ROBS is to have a minimum balance of around $50,000 in your retirement accounts.

A ROBS is a complex transaction that can result in fines and penalties if done incorrectly, so we recommend using the service of a ROBS provider like Guidant Financial to walk you through the process. The provider has comprehensive legal and audit support services as well as a satisfaction guarantee for its services.

Visit Guidant Financial

Frequently Asked Questions (FAQs)

How can a business improve its cash flow.

Cash flow can be improved by adjusting the timing of making debt payments and of receiving income. Other methods include reducing business debt by refinancing debt, negotiating terms with creditors, and reducing unnecessary expenses. You can also increase income by encouraging faster repayment of invoices and offering discounts.

How is cash flow important for a business?

Cash flow can negatively impact a company’s credit and finances. Without sufficient funds, a business can struggle to make debt payments in a timely manner. Not having sufficient funds can also hinder a company’s ability to restock inventory, something that can hurt its sales.

What are ways to identify cash flow issues?

Reviewing at least the past 12 months of business bank statements can help you identify all of your recurring and less frequently occurring business expenses. Statements to payments made to business credit cards should also be reviewed.

You now know the many solutions to how to solve cash flow problems. You can reduce unnecessary business expenses, encourage faster repayment of accounts receivables, negotiate more flexible terms with vendors, and more.

If you’ll be getting a loan, the tips we mention in our article on how to get a small business loan can increase your approval odds. Depending on the severity of your cash flow issues, you can choose to employ one or multiple solutions we’ve identified in this guide.

About the Author

Find Andrew On LinkedIn

Andrew Wan is a staff writer at Fit Small Business, specializing in Small Business Finance. He has over a decade of experience in mortgage lending, having held roles as a loan officer, processor, and underwriter. He is experienced with various types of mortgage loans, including Federal Housing Administration government mortgages as a Direct Endorsement (DE) underwriter. Andrew received an M.B.A. from the University of California at Irvine, a Master of Studies in Law from the University of Southern California, and holds a California real estate broker license.

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9 common cash flow problems and how to solve them

As entrepreneurs, we all have a fear of running out of money and having cash flow problems. The absence of a “predictable paycheck” is scary, but the rewards of owning your own business far outweigh those risks.

That’s not to say we should put this fear completely aside. In fact, a lack of finances is the second biggest reason businesses fail . But you don’t have to be a part of that statistic.

Paying attention to your cash flow and tackling challenges head-on is a great way to make sure you always have the funds you need to stay in business. Below, let’s look at how you can be proactive in maintaining healthy cash flow for your small business.

What is cash flow?

Cash flow is the blanket term for all of the money coming into and going out of your business. In financial terms, it’s the culmination of accounts receivable and accounts payable.

Think of it this way: Cash flow refers to the flow, or movement, of money both in and out. It’s not about sales or revenue, it’s about the actual, cold hard cash that is made available (or unavailable) to your business.

Cash flow is extremely important for small businesses. Even if you don’t consider yourself a “money person,” you will have to do some basic business accounting in your business. As an entrepreneur, you need to keep your eye on cash flow. If you don’t, you could find yourself in situations where you don’t have any money to continue operating your business.

To start, it’s helpful to consider some of the more common cash flow problems for SMBs and what you can do to mitigate them.

9 common cash flow problems

Late or partial payments.

Outstanding payments are one of the biggest challenges SMBs face when it comes to cash flow. One study showed that 60% of invoices are paid late. This is a real cash flow problem because you’ve done the work, yet you haven’t received the money for it. Not only are you out the profit, but you’re also out whatever it cost you to complete the job.

More than 30% of SMBs are negatively impacted and spend an average of 15 days each year chasing payments alone.

According to this study , the smallest businesses wait an average of 72 days before their invoices are paid. That’s rough!

And if you offer partial payments, that also ties up your cash. Allowing your customers to pay in installments, especially for large purchases, is a smart strategy for driving sales. But it’s not great for your cash flow.

How to solve it:

• Get paid up front, even just a deposit can help.
• Send your invoices ASAP.
• Implement automated payment reminders on your invoices.
• Offer discounts for early payments and payments made in full — and charge a fee for late ones.
• Run a credit check on your customers first (this may not be applicable to all businesses).
• Provide multiple payment options.
• Sign up for a lockbox where customers and their banks can mail physical checks.
• Take proper steps to handle non-payments and similar issues

Sending invoices with online-enabled payments is a great way to ensure that your clients pay in-full and on-time. Check out the video below to learn more!

Not enough cash buffer on hand

A cash buffer is essentially a financial safety net for your business. To determine how much cash buffer your business needs, you’ll divide cash balances by cash outflows. This will tell you the number of days that your cash on hand will be able to make up for no incoming cash flow.

According to one JPMorgan Chase study , the average SMB has just 27 days of cash buffer on hand. This may vary depending on your business though, so it’s best to calculate your own cash flow to understand your business' unique situation.

How to fix it:

• Use the calculation provided above, or this cash flow calculator , to understand the appropriate cash buffer for your business.
• Renegotiate payment dates to your vendors and from your customers.
• Maintain and monitor a cash flow management spreadsheet.

Delayed payment posting

Just because you’ve received a payment doesn’t mean you have access to that money. With electronic payment processing, there’s often a delay between the time the payment was made and the moment the cash is accessible in your account(s).

This payment posting time is pretty much unavoidable, as that’s how banks work. But there are some ways you can plan for it and ensure your cash flow is stable.

• Offer cash payment options.
• Incentivize cash payments with a discount or freebie.
• Connect your bank account to your invoicing software so customers can pay you via direct deposit, which may post more quickly.
• Open a line of credit to make purchases and preserve your cash on hand.

Disorganization

One study conducted by Staples found that three in four SMBs with struggling or failing businesses believe disorganization has led to a loss in productivity. And almost 40% aren’t “good with numbers.”

These are real challenges when it comes to maintaining healthy cash flow. You could go broke without even knowing it. If you’re not tracking, budgeting, planning, and forecasting, you could be in the dark about the true state of your business finances.

• Create a statement of cash flow to predict surges and declines.
• Get a jump on next year’s taxes and start organizing your filing now .
• Implement a financial tracking tool like Wave so you can automate some of the processes and reduce the risk of human error.
• Use a receipt scanning app to take a picture of receipts with your phone and upload them to your account.

Rapid growth

If your business has grown quickly, congratulations! While that growth is great for your bottom line, you may also face some growing pains along the way, with cash flow being just one of them.

As you make more money, you also have to spend more money to run your business. Your overhead could increase because you’re outsourcing more, you need to hire more employees, you have to upgrade tech tools to higher plans, or you need to invest in more inventory upfront.

• Implement a tech stack that can grow with you. Start by identifying your future business goals and determining your needs from there.
• Generate some forms of passive income to compensate for a reduced income stream, or even fund some of your other business growth.
• Only hire when you absolutely need to and do so one at a time (at least at first).

Sales challenges

Whether you overestimated your sales volumes or sales have inexplicably come to a complete halt, any time that incoming money slows down, your cash flow suffers. Sometimes this decline in sales is caused by external factors, like market fluctuations or even the weather for a brick-and-mortar business that relies on foot traffic.

Other times, you can look internally. Is your marketing not resonating? Maybe it’s your lead nurturing process that’s the issue. And in many cases, it’s a combination of both controllable internal challenges and unavoidable external ones that can work against your sales goals.

• There are a number of ways to solve this issue; it really boils down to why you’re not seeing any sales. Online businesses might look at their Google Analytics or conversion software, whereas a freelance photographer might consider implementing a referral program with incentives.
• Check out our guide to small business marketing for more ideas.

Varied payment terms

When your incoming and outgoing cash flow doesn’t match up, this can lead to shortages (and major surpluses).

For example, in my digital marketing business, I have one client account for which I outsource a lot of work to various contractors. I invoice my client at the beginning of each month after the work has been done. My contractors’ billing terms are all different. Some invoice upfront while others do after the fact, and the frequency and timing vary too. I can always count on my accounts getting low the few days before I invoice my client each month.

• In my case, I could create a separate bank account which only handles money for that client. This would also help me see over time how much this work is netting me.
• Renegotiate payment terms so everything is synchronized.
• Automate invoicing, bank transfers, and payroll to better align with the varied schedules.

Spending too much

While sometimes you need to spend money to make money, there’s also the issue of spending too much money. If you find your overhead is getting out of hand, it’s time to dig into where your biggest expenses are and how you can reduce (or even eliminate) them.

• Automate repetitive tasks that you previously hired people to do.
• Map out a business plan and financial milestones you want to meet before you make different investments.
• Monitor your ongoing expenses and categorize them. See which ones are the highest and tackle ways to reduce those first.
• Go paperless . One study from MultiBriefs showed that businesses spend $80 per employee on paper each year.

Too much inventory

If you’re in retail or sell physical products, inventory is one of your biggest and most important assets. It’s how you generate more money. But the cost to produce each item is more than what you paid your supplier for it. There are holding costs associated with keeping stock on hand.

Having safety stock is important to retail operations and avoiding costly stockouts, but if you have too much on hand, this can actually have a harmful effect.

• Improve your forecasting with integrated inventory management software and point-of-sale system.
• Only order what you truly need. Here’s how to find out your ideal safety stock level:

(Maximum daily usage X Maximum lead time in days) – (Average daily usage X Average lead time in days)

• Implement auto-reorder and purchase order processing.
• Make sure you account for marketing and advertising campaign budgets and order merchandise accordingly.

Moving forward with curbing your cash flow problems

One of the goals of being an entrepreneur is to make money. But you can still make money and go broke. It just takes some planning and proactive thinking to make sure you maintain healthy cash flow, curb any cash flow problems, ultimately stay in business.

Send invoices, estimates, and other docs:

• via links or PDFs
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The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

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Common cash flow problems and the best solutions

Cash flow is an integral part of smooth business operation. Without it, your business can be hamstrung – unable to deploy capital, restock products, or pursue growth. But there are a whole host of potential cash flow problems just waiting to cause issues. Here’s everything you need to know about them.

82% of businesses fail  because of cash flow problems. But even the businesses who don’t fail still have to face them in one form or another. How can your business prepare for the inevitable issues with cash flow it’s bound to face at some point in its future?

The best solution to cash flow problems is two-fold – understand what the potential risks are and implement technological tools to help you pre-empt them. We’re here to guide you through what the most common cash flow problems are, what kinds of damage they can cause, and how you can solve them with an effective cash forecasting solution.

What are cash flow problems?

In essence, a cash flow problem can be defined as a situation where total liabilities created exceed total assets generated in a given time period, resulting in a net negative flow of cash into the business. These problems are incredibly damaging to business operations, as negative cash flow makes it much more difficult to deploy capital or invest in growth.

In the worst case, cash flow problems can lead to insolvency – the inability to pay creditors in line with established payment terms. This is a potentially existential business risk, and avoiding it should be a high priority for all businesses. But even lesser cash flow problems, like not having enough of a cash reserve to buy essential products or services, can have a drastic impact on the bottom line.

There is a wide range of reasons why cash flow problems can arise, and understanding what they are is a key component in being able to deal with them.

Common cash flow problems

Late payments.

Making sales is great, but if it’s not backed up with customers paying on time, you’ve got problems – and there are many potential  causes of late payments . Collecting your  accounts receivable  too slowly can seriously inhibit your cash flow opportunities, stifling growth and potentially causing you problems with paying your own bills.

Poor inventory management

Inventory management  is a fine balancing act – not enough inventory and you run the risk of being unable to fulfil customer orders but too much and you are inefficiently deploying capital. Particularly poor inventory management in the form of owning too much stock can lead to poor cash flow if you have too much capital tied up and not enough to cover your costs.

Unexpected expenses

Expenses, especially when they’re unexpected, can also cause significant cash flow issues. If a key piece of equipment breaks in a month when you’re already struggling to make ends meet, for instance, you might find yourself in a position where you’re forced to stop production while you raise capital.

Poor financial planning

Without proper financial planning in the form of a cash flow forecast outlining expected income versus expected expenses for a set time period, you’re in the dark as to what lies beyond the horizon for your cash flow. An accurate cash flow forecast will help you to spot potential problems before they arise.

Personnel changes

Finally, staff costs can also contribute towards cash flow problems, especially in situations where your business is growing rapidly. If you land a new client with large requirements, for example, you might be required to make new hires to meet demand. However, if you don’t have the cash to pay them when it comes to the end of the month, you’ll find yourself in need of credit.

Solutions to cash flow problems

So, how can businesses prepare for the negative cash flow situations outlined above and manage cash flow more effectively? Understanding the problems is the best first step, but understanding alone doesn’t help solve the problems themselves.

Technology solutions such as cash flow forecasting platforms, however, can be deployed to enable more effective cash flow management using a combination of real-time data and analytics to enable better accuracy, visibility, and financial intelligence.

Cash flow forecasting defined

Cash flow forecasting  is a way of estimating the flow of cash coming in and out of your business, across all areas, over a given period of time. A cash flow forecast shows your projected cash based on income and expenses and is an important tool when it comes to making decisions about activities such as funding, capital expenditure, and investments.

Cash forecasting is the  number one priority  for treasurers, as their job and core responsibility is to have complete control, management, and oversight of the finances within a company. It’s extremely important for a treasurer to have accurate, real-time data and forecasts so that they can make the right decisions for their company and avoid any financial turmoil.

The power of cash flow forecasting software

A sophisticated cash forecasting solution should provide treasurers with a holistic view of their financial apparatus.

There are many benefits to having a technology-driven cash forecasting solution in place, from reducing the need for manual data entry and spreadsheets to having a better and more holistic understanding of short-term, medium-term, and long-term forecasting. Some benefits of technology-driven forecasting include:

• Better data-driven decision-making:  Treasurers can more accurately keep track of all finances within a company when they have the tools of  digital treasury management  at their disposal. From employee expenses to payroll and rent, they can quickly locate, view, and analyze important data that will enable them to make informed decisions about the business. With the right information, treasurers can  optimize their working capital , while avoiding negative financial situations.
• Reduce manual processing and data entry:  Compiling complex financial data (manually, especially) can be time-consuming, costly, and can be prone to critical human error. As the world continues to work remotely and use less paper overall, it can be quite difficult for a treasury team to continue using paper financial data and keep track of it accordingly. Having all financial data located in one place will ensure that the business has a full overview of their company’s receivables, payables, and financial forecast.
• Enhanced, high-level accuracy:  Accurately forecasting the cash flow of a business can be an arduous task, as treasurers have to deal with data in different formats, currencies, time zones, and work with multiple stakeholders and teams. As businesses operate in hyper-complex and fast environments, it can be difficult to accurately gather the right information and predict forecasts. With Taulia’s Cash Forecasting solution, treasurers can get up-to-date information in real-time, anytime, and anywhere, enabling them to predict future financial situations and keep all stakeholders informed. With a cash forecasting solution, treasurers can get up-to-date information in real-time, anytime, and anywhere, enabling them to predict future financial situations and keep all stakeholders informed.
• Growth and innovation:  A company that can accurately forecast its cash, can make plans for its future growth by investing in the right resources, tools, and developments. When a company can accurately track their cash flow, they can decide when and how they are going to invest in new technologies, research, and development, and perhaps expand into new markets. With higher accuracy and control, companies can make powerful decisions that can put them in a better position to grow, expand, and meet their objectives.

Avoid cash flow problems with Taulia

Technology-driven, cash forecasting solutions are a gamechanger for treasurers and anyone who is looking to make better use of their liquidity while spending significantly less time on manual data collection and entry. To learn how we can help you make better decisions for your business, learn more about our supply chain and cash flow management platform by getting in touch with us  today.

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Cash Flow Statement: Problems and Solutions | Accounting

Here is a compilation of top three accounting problems on cash flow statement with its relevant solutions.

From the following summary of Cash Account of X Ltd., prepare Cash Flow Statement for the year ended 31st March 2007 in accordance with AS-3 using the direct method. The company does not have any cash equivalents.

Cash Flow Statement (CFS)

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 27, 2023

Get Any Financial Question Answered

Table of contents, what is a cash flow statement (cfs).

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.

By looking at the cash flow statement, one can see whether the company has sufficient cash flowing in to pay its debts, fund its operations, and return money to shareholders via dividends or stock buybacks.

CFS bridges the income statement and balance sheet because it shows how money moves in and out of the business via three main channels: operating, investing, and financing activities.

It produces what is called the net cash flow by breaking down where the changes in the beginning and ending balances came from.

The cash flow statement is focused on the cash accounting method, which means that business transactions reflect in the financial statement when the cash flows into or out of the business or when actual payments are received or distributed.

Structure of the Cash Flow Statement

The Cash Flow Statement has three main sections: cash flows from operating activities, investing activities, and financing activities.

Together, these different sections can help investors and analysts determine the value of a company as a whole. Let us learn more about them below.

Cash Flow From Operating Activities (CFO)

This section covers cash transactions from all of a business’ operational activities, such as receipts from sales of goods and services, wage payments to employees, payments to suppliers, interest payments, and tax payments.

For an investment company or a trading portfolio, equity instruments or receipts for the sale of debt and loans are also included because it is counted as a business activity.

It can be considered as a cash version of the net income of a company since it starts with the net income or loss, then adds or subtracts from that amount to produce a net cash flow figure.

Items that are added or subtracted include accounts receivables, accounts payables, amortization, depreciation, and prepaid items recorded as revenue or expenses in the income statement because they are non-cash.

Cash Flow From Investing Activities (CFI)

This section is the result of investment gains and losses. It includes cash spent on property, plant, and equipment. Analysts look in this section to see if there are any changes in capital expenditures (CapEx) .

Companies could generate cash flow from investing by selling equipment, property, or assets . Loans given to vendors or received from customers, as well as any payments associated with mergers and acquisitions (M&A) , are also included in this section.

Cash-out items are those changes caused by the purchase of new equipment, buildings, or marketable securities. Cash-in items are when a company divests an asset.

Cash Flow From Financing Activities (CFF)

This section records the cash flow between the company, its shareholders, investors, and creditors. It provides an overview of cash utilized in business financing.

Transactions in CFF typically involve debt, equity , dividends , and stock repurchases.

Cash-out transactions in CFF happen when dividends are paid, while cash-in transactions occur when the capital is raised.

Thus, when a company issues a bond to the public, the company receives cash financing. In contrast, when interest is given to bondholders, the company decreases its cash.

How Cash Flow Is Calculated

There are two accepted methods in calculating cash flow: direct and indirect.

Direct Cash Flow Method

This method measures only the cash received, typically from customers, and the cash payments made, such as to suppliers. These inflows and outflows are then calculated to arrive at the net cash flow.

This method of calculating cash flow takes more time since you need to track payments and receipts for every cash transaction.

Figures used in this method are presented in a straightforward manner. They can be calculated using the beginning and ending balances of various asset and liability accounts and assessing their net decrease or increase.

Indirect Cash Flow Method

Using this method, cash flow is calculated through modifying the net income by adding or subtracting differences that result from non-cash transactions. This is done in order to come up with an accurate cash inflow or outflow.

Instead of presenting transactional data like the direct method, the calculation begins with the net income figure found in the income statement of the company and makes adjustments to undo the impact of accruals that were made during the accounting period.

The major differences between the two methods are outlined in the table below:

Examples of a Cash Flow Statement

To present a clearer picture of the two methods, there are some examples presented below.

Calculated Using the Direct Cash Flow Method

An example of the cash flow statement using the direct method for a hypothetical company is shown here:

In the above example, the business has net cash of $50,049 from its operating activities and $11,821 from its investing activities. It has a net outflow of cash, which amounts to $7,648 from its financing activities.

As a result, the business has a total of $126,475 in net cash flow at the end of the year.

Calculated Using the Indirect Cash Flow Method

This is another example of a cash flow statement of Nike, Inc. using the indirect method for the fiscal year ending May 31, 2021.

This cash flow statement shows that Nike started the year with approximately $8.3 million in cash and equivalents.

The business brought in $6.65 million through its operating activities. Meanwhile, it spent approximately $3.8 million in investment activities, and a further $1.45 million in financing activities.

The changes in the value of cash balance due to fluctuations in foreign currency exchange rates amount to $143 million.

Consequently, the business ended the year with a positive cash flow of $1.5 million and total cash of $9.88 million.

Importance of a Cash Flow Statement

The CFS is one of the most important financial statements for a business. Cash is the lifeblood of any organization, and a company needs to have a good handle on its cash inflows and outflows in order to stay afloat.

There are several reasons why the cash flow statement is so important:

Provides an Overview of Spending

The cash flow statement presents a good overview of the company’s spending because it captures all the cash that comes in and goes out.

This information is helpful so that management can make decisions on where to cut costs. It also helps investors and creditors assess the financial health of the company.

Maintains an Optimum Cash Balance

Another important function of the cash flow statement is that it helps a business maintain an optimum cash balance.

Management can use the information in the statement to decide when to invest or pay off debts because it shows how much cash is available at any given time.

Focuses on Generating Cash

The cash flow statement also encourages management to focus on generating cash.

This is because when a company knows where its cash is going, it can take steps to make sure that more cash is coming in than going out.

Useful as a Basis for Short-Term Planning

A cash flow statement is an important measurement because it provides information that can be used to make short-term plans.

For instance, if a company realizes that it will have a cash shortfall in the next month, it can take steps to ensure enough funds are available.

Limitations of the Cash Flow Statement

The Cash Flow Statement has a few limitations:

Inability to Compare Similar Industries

The cash flow statement is useful when analyzing changes in cash flow from one period to the next as it gives investors an idea of how the company is performing.

However, it does not measure the efficiency of the business in comparison to a similar industry. This is because terms of sales and purchases may differ from company to company.

Other companies may also have a higher capital investment which means they have more cash outflow rather than cash inflow.

Does not Replace the Income Statement

The cash flow statement does not replace the income statement as it only focuses on changes in cash. In contrast, the income statement is important as it provides information about the profitability of a company.

Lack of Focus on Profitability

The cash flow statement will not present the net income of a company for the accounting period as it does not include non-cash items which are considered by the income statement.

Therefore, it does not evaluate the profitability of a company as it does not consider all costs or revenues.

Cash Flow Statement vs Income Statement vs Balance Sheet

Three financial statements provide insights into the financial performance of a company and potential issues that may need to be addressed: the income statement, balance sheet , and cash flow statement.

These three documents offer unique information that serves as the foundation of corporate accounting.

Below is a comparison between cash flow statement, income statement, and balance sheet:

Final Thoughts

The cash flow statement is an essential financial statement for any business as it provides critical information regarding cash inflows and outflows of the company.

It helps businesses to make crucial decisions about spending, investments , and credit.

Cash flow statements display the beginning and ending cash balances over a specific time period and points out where the changes came from (i.e operating activities, investing activities, and financing activities).

This information allows businesses to forecast future cash needs, make informed investment decisions, and track actual performance against budgeted targets.

However, the cash flow statement also has a few limitations, such as its inability to compare similar industries and its lack of focus on profitability.

Therefore, it should always be used in unison with the income statement and balance sheet to get a complete financial overview of the company.

Cash Flow Statement (CFS) FAQs

What are the implications of positive and negative cash flows.

Positive cash flow reveals that more cash is coming into the company than going out. This is a good sign as it tells that the company is able to pay off its debts and obligations. Negative cash flow typically shows that more cash is leaving the company than coming in, which can be a reason for concern as the company may not be able to meet its financial obligations in the future. However, this could also mean that a company is investing or expanding which requires it to spend some of its funds.

What is the difference between direct and indirect cash flow statements?

Direct cash flow statements show the actual cash inflows and outflows from each operating, investing, and financing activity. While the indirect cash flow method makes adjustments on net income to account for accrual transactions.

What is the importance of cash flow statements?

Cash flow statements are important as they provide critical information about the cash inflows and outflows of the company. This information is important in making crucial decisions about spending, investments, and credit.

What are the main components of a cash flow statement?

The main components of a cash flow statement are cash flows from operating activities, investing activities, and financing activities.

How are cash flow and free cash flow different?

Cash flow is the total amount of cash that is flowing in and out of the company. Free cash flow is the available cash after subtracting capital expenditures.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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How to Read & Understand a Cash Flow Statement

• 30 Apr 2020

Whether you’re a working professional, business owner, entrepreneur, or investor, knowing how to read and understand a cash flow statement can enable you to extract important data about the financial health of a company.

If you’re an investor, this information can help you better understand whether you should invest in a company. If you’re a business owner or entrepreneur, it can help you understand business performance and adjust key initiatives or strategies. If you’re a manager, it can help you more effectively manage budgets , oversee your team, and develop closer relationships with leadership—ultimately allowing you to play a larger role within your organization.

Not everyone has finance or accounting expertise. For non-finance professionals , understanding the concepts behind a cash flow statement and other financial documents can be challenging.

To facilitate this understanding, here’s everything you need to know about how to read and understand a cash flow statement.

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What is a Cash Flow Statement?

The purpose of a cash flow statement is to provide a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.

The cash flow statement is typically broken into three sections:

• Operating activities
• Investing activities
• Financing activities

Operating activities detail cash flow that’s generated once the company delivers its regular goods or services, and includes both revenue and expenses. Investing activities include cash flow from purchasing or selling assets—think physical property, such as real estate or vehicles, and non-physical property, like patents—using free cash, not debt. Financing activities detail cash flow from both debt and equity financing.

Based on the cash flow statement, you can see how much cash different types of activities generate, then make business decisions based on your analysis of financial statements .

Ideally, a company’s cash from operating income should routinely exceed its net income, because a positive cash flow speaks to a company’s ability to remain solvent and grow its operations.

It’s important to note that cash flow is different from profit , which is why a cash flow statement is often interpreted together with other financial documents, such as a balance sheet and income statement.

How Cash Flow Is Calculated

Now that you understand what comprises a cash flow statement and why it’s important for financial analysis, here’s a look at two common methods used to calculate and prepare the operating activities section of cash flow statements.

Cash Flow Statement Direct Method

The first method used to calculate the operation section is called the direct method , which is based on the transactional information that impacted cash during the period. To calculate the operation section using the direct method, take all cash collections from operating activities, and subtract all of the cash disbursements from the operating activities.

Cash Flow Statement Indirect Method

The second way to prepare the operating section of the statement of cash flows is called the indirect method . This method depends on the accrual accounting method in which the accountant records revenues and expenses at times other than when cash was paid or received—meaning that these accrual entries and adjustments cause the cash flow from operating activities to differ from net income.

Instead of organizing transactional data like the direct method, the accountant starts with the net income number found from the income statement and makes adjustments to undo the impact of the accruals that were made during the period.

Essentially, the accountant will convert net income to actual cash flow by de-accruing it through a process of identifying any non-cash expenses for the period from the income statement. The most common and consistent of these are depreciation , the reduction in the value of an asset over time, and amortization , the spreading of payments over multiple periods.

Related: Financial Terminology: 20 Financial Terms to Know

How to Interpret a Cash Flow Statement

Whenever you review any financial statement, you should consider it from a business perspective. Financial documents are designed to provide insight into the financial health and status of an organization.

For example, cash flow statements can reveal what phase a business is in: whether it’s a rapidly growing startup or a mature and profitable company. It can also reveal whether a company is going through transition or in a state of decline.

Using this information, an investor might decide that a company with uneven cash flow is too risky to invest in; or they might decide that a company with positive cash flow is primed for growth. Similarly, a department head might look at a cash flow statement to understand how their particular department is contributing to the health and wellbeing of the company and use that insight to adjust their department’s activities. Cash flow might also impact internal decisions, such as budgeting, or the decision to hire (or fire) employees.

Cash flow is typically depicted as being positive (the business is taking in more cash than it’s expending) or negative (the business is spending more cash than it’s receiving).

Related: How Learning About Finance Can Jumpstart Your Career No Matter Your Industry

Positive Cash Flow

Positive cash flow indicates that a company has more money flowing into the business than out of it over a specified period. This is an ideal situation to be in because having an excess of cash allows the company to reinvest in itself and its shareholders, settle debt payments, and find new ways to grow the business.

Positive cash flow does not necessarily translate to profit, however. Your business can be profitable without being cash flow-positive, and you can have positive cash flow without actually making a profit.

Negative Cash Flow

Having negative cash flow means your cash outflow is higher than your cash inflow during a period, but it doesn’t necessarily mean profit is lost. Instead, negative cash flow may be caused by expenditure and income mismatch, which should be addressed as soon as possible.

Negative cash flow may also be caused by a company’s decision to expand the business and invest in future growth, so it’s important to analyze changes in cash flow from one period to another, which can indicate how a company is performing overall.

Cash Flow Statement Example

Here's an example of a cash flow statement generated by a fictional company, which shows the kind of information typically included and how it's organized.

Go to the alternative version .

This cash flow statement shows Company A started the year with approximately $10.75 billion in cash and equivalents.

Cash flow is broken out into cash flow from operating activities, investing activities, and financing activities. The business brought in $53.66 billion through its regular operating activities. Meanwhile, it spent approximately $33.77 billion in investment activities, and a further $16.3 billion in financing activities, for a total cash outflow of $50.1 billion.

The result is the business ended the year with a positive cash flow of $3.5 billion, and total cash of $14.26 billion.

The Importance of Cash Flow

Cash flow statements are one of the most critical financial documents that an organization prepares, offering valuable insight into the health of the business. By learning how to read a cash flow statement and other financial documents, you can acquire the financial accounting skills needed to make smarter business and investment decisions, regardless of your position.

Are you interested in gaining a toolkit for making smart financial decisions and the confidence to clearly communicate those decisions to key internal and external stakeholders? Explore our online finance and accounting courses and download our free course flowchart to determine which best aligns with your goals.

Data Tables

Company a - statement of cash flows (alternative version).

Year Ended September 28, 2019 (In millions)

Cash and cash equivalents, beginning of the year: $10,746

OPERATING ACTIVITIES

Investing activities, financing activities.

Increase / Decrease in Cash and Cash Equivalents: 3,513

Cash and Cash Equivalents, End of Year: $14,259

Go back to the article .

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Cash Flow Statement Problems and Solution: Indirect Method

• Published on: April 8, 2021

Preparation of Cash Flow Statement

There are two methods to prepare cash flow statement; they are:

(1) Direct method

(2) Indirect method

Both methods have three activities; they are:

(a) Operating activities

(b) Investing activities

(c) Financing activities

Keep in Mind (KIM)

Steps of operating activities section of the cash flows statement by using indirect method:

1. Start with net income after tax from the income statement.

2. Add back non-operating and non-cash expenses; such as depreciation, amortization, interest expenses, loss on sales of fixed assets and investment

3. Deduct non-operating incomes; such as interest income, dividend income, rental income, profit on sales of fixed assets and investment

4. Adjust changes in current assets and liabilities; such as debtors, creditors, outstanding, prepaid

5. Deduct income tax paid

6. Add income tax refund

7. Adjust extraordinary items (if any)

Cash Flow Statement (Indirect Method)

ABC Company Ltd

1. Net profit before tax | Net income before tax 

Operating activities of cash flow statement under indirect method is started with net income before tax (net profit before tax).

Sometimes, there may be net income after tax; in that conditions we must find out net income before tax.

Calculation of net profit before tax

Provision for tax

Provision for tax refers to an estimated income tax amount expected to pay to the government for a given accounting period

At the time of preparing the financial statements, taxes are not paid; tax is paid at a later date,

By making provisions for taxes, companies can estimate their future tax liabilities and prepare for them accordingly.

This helps companies manage their cash flows and avoid any unexpected tax bills.

The provision for tax is shown on the balance sheet as a current liability.

When taxes are actually paid, the provision is reversed; and the actual tax paid is recorded as an expense in the income statement.

General reserve

The general reserve is created by a company to set aside funds for various purposes.

It is a portion of a company’s profits that are not distributed as dividends to shareholders.

It is retained by the company to be used for future needs.

General reserves can be created for a variety of reasons, they are:

To provide a buffer for unforeseen losses or expenses,

To finance future growth or expansion,

To prepare for potential legal liabilities or lawsuits,

To build up cash reserves to cover anticipated future capital, expenditures etc.

Capital reserve

Capital reserve is created by a company to set aside funds for a specific purpose, such as the acquisition of fixed assets, reduction of debt or financing of future projects.

Capital reserves are typically not available for distribution to shareholders as dividends, as they are intended to be used for long-term purposes.

Usually, capital reserves are created when a company sells assets, issues new shares or realizes gains from investments.

Creating a capital reserve can provide a company with greater financial flexibility and help it to achieve its long-term strategic goals.

Capital reserves may have tax and legal implications.

Interim dividend

An interim dividend is a dividend payment made by a company to its shareholders before the end of its financial year.

Large companies prepare quarterly (Q) based financial statements like Q1, Q2, Q3 and Q4 (final).

Generally, interim dividends are paid out of the company’s profits and are paid in addition to any final dividend.

When the company pays an interim dividend, its share value increases in the stock market.

Creditors and suppliers also provide more credit facilities.

Interim dividends can be used to provide shareholders with a regular income stream or to reward them for their investment in the company.

Interim dividends are typically paid in cash, but they can also be paid in the form of additional shares of stock or other forms of assets.

Proposed dividend

A proposed dividend is a recommendation by a company’s board of directors to pay a dividend to its shareholders.

The proposed dividend represents the amount of dividend to be paid at the upcoming annual general meeting (AGM).

The proposed dividend is subject to approval by the shareholders at the AGM.

If the shareholders approve the proposed dividend, it will be paid out to the shareholders on the dividend payment date.

Proposed dividend depends on various factors such as company’s financial performance, cash position, future growth, company’s investment opportunities, debt obligations and other financial commitments.

Final dividend

In a cash flow statement, the final dividend paid is typically included under the “cash flows from financing activities” section.

The final dividend paid represents the amount of cash distributed to the company’s shareholders as a final payment for the current fiscal year.

This payment is declared by the company’s board of directors after the annual financial statements have been prepared and approved by the shareholders at the annual general meeting.

The final dividend paid is subtracted from the cash balance because it represents a cash outflow.

Last year’s proposed dividend is paid in the current year as the final dividend.

Extraordinary loss

Extraordinary losses refer to significant and unusual losses incurred by a company.

These are not considered to be a part of the company’s normal operations.

These losses are typically one-time events and are not expected to occur again in the future.

Some extraordinary losses are:

Loss from a discontinued operation.

Legal settlements expenses.

No insurance claim due to natural disasters or unforeseen events.

Unusual loss from foreign currency transactions.

Gain or loss from early extinguishment of debt.

Significant tax payments related to prior years.

Write-down of inventory or other current assets due to obsolescence or other factors.

Keep in mind

Extraordinary gain

An extraordinary gain is a significant and unusual gain that is not expected to recur in the future.

It is not considered a part of a company’s normal operating activities.

It is a one-time event that is outside the scope of the company’s regular business operations.

Some extraordinary gains are:

Gain from a discontinued operation.

Unusual gain from foreign currency transactions.

Significant tax refunds related to prior years.

A tax refund is cash received by a company from a tax authority due to overpayment of taxes.

It is also known as a tax credit.

Tax payment was previously recorded as an operating expense.

Therefore, the tax refund should be recorded as a cash inflow in operating activities of the cash flow statement.

This is because the tax payment was originally deducted as an operating expense, and the tax refund represents a reduction in that expense.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country  

PROBLEM: 1A

ABC Company has following extracted data:     

The net income after tax is $48,924 after following adjustments:

Provision for tax (tax payable) $16,308

Required: Calculation of net profit before tax

[Answer: NPBT = $65,232]

PROBLEM: 1B

The net income after tax is $48,924

Tax refund $1,240

[Answer: NPBT = $63,992]

PROBLEM: 1C

The net income after tax is $48,924 after provision for tax (tax payable) $16,308

Retained earnings transactions:

Interim dividend paid $8,430

Transfer to general reserve $2,745

[Answer: NPBT = $92,715]

PROBLEM: 1D

ABC Company has following extracted data: 

Share capital:

Equity share capital $375,000

8% Preference share capital $225,000

The retained earnings balance is $65,232 after following adjustments:

Transfer to capital reserve $2,745

Additional information:

The company declared 12% dividend on equity share

[Answer: NPBT = $139,407]

PROBLEM: 1E

ABC Company had following extracted balance sheet data: 

Retained earnings was after adjusting following information for the Year 2:

Interim dividend paid on equity shares $25,600

Final dividend paid on equity shares @15% and as stated on preference shares.

[Answer: NPBT = $179,564]

PROBLEM: 1F

Interim dividend paid $43,740

Last year’s dividend paid in current year

Transfer to general reserve $56,960

Refund of tax $3,690

Loss due to earthquake $120,780

Insurance proceeds of earthquake disaster settlement $84,710

 [Answer:  NPBT = $388,055]

2. Add back non-cash and non-operating expenses

Non-cash expenses are those expenses that do not involve in cash inflow or cash outflow.

These expenses either decrease assets or increase liabilities.

They are depreciation, amortization, depletion, bad debts and provision for bad debts etc.

Non-operating expenses are those expenses that are not directly related to a company’s main business operations.

They are interest expense, losses on the sale of assets or investment, foreign exchange losses, legal settlements etc.

PROBLEM: 2A

ABC Company has following extracted financial data:     

The net income before tax is $172,455

Depreciation on fixed assets $52,125

Goodwill amortization $15,575

Loss on sales of fixed assets $28,340  

Cash Flow Statement

3. Non-operating incomes

Non-operating incomes are those incomes that are NOT part of core business operations.

These activities are not directly related to the production or sale of goods and services.

They are profit on sales of fixed asset and investment, interest income, rental income, dividend income, foreign exchange gains, insurance claim

PROBLEM: 2B

Dividend received $2,465

Rental income $12,730

Profit on sales of investment $1,045

4. Change in current assets and liabilities | Changes in operating assets and liabilities | Adjustment for working capital

Changes in current assets and liabilities affect a significant role on a company’s financial health and performance.

Current assets should be converted into cash within a year.

Some common current assets are:

Cash and bank balance

Debtors, customers, bills receivable, account receivable, trade receivable, notes receivable

Inventories, closing stock, merchandise

Advance expenses, prepaid expenses, prepayment

Short-term investment etc   

Increase in current assets decreases cash viz cash outflow.

Decrease in current assets increases cash viz cash inflow.

Current liabilities should be paid or settled within one year.

Some common current liabilities are

Bank overdraft

Creditors, suppliers, vendors, account payable, bills payable, trade payable, notes payable

Outstanding expenses, expenses payable, expenses due

Income tax payable, dividend payable, interest payable

Advance incomes, advance received, advance on sales

Calls in advance, unclaimed dividend

Short-term loan etc

Increase in current liabilities increases cash viz cash inflow.

Decrease in current assets decreases cash viz cash outflow.

PROBLEM: 2C

Decrease in account receivable $14,325

Increase in inventory $36,912

Increase in office expenses payable $945

Decrease in account payable $9,104 

Required: Cash generated from operation

[Answer: $221,509]

5. Tax paid

Every organization, which is registered in value added tax (VAT); goods and service tax (GST) and permanent account number (PAN) has pay tax to the government.

Tax is annual expenses for the organization but it is revenue for the government.

Organization needs to pay tax to the government on the basis of turnover and profit position of the company.

If organization is established in backward area, the government can provide some tax subsidy or exemption to the organization; it is called tax credit or exemption.

It is the tax benefit provided to the business by the government.

There are different adjustments of tax in the cash flow statement; some of them are:

Provision for tax given in comparative balance sheet as well as income statement 

When provision for taxation (tax payable) is given in balance sheet and income statement, we have to prepare ledger.

ABC Company Ltd has following extracted information:

Extracted Comparative Balance Sheet

Extracted Income Statement for Year 2

Required: Tax treatment

[Answer: Tax paid = $4,500]

Provision for Taxation Account

PROBLEM: 3A

EA Traders has following extracted data:

Retained earnings of Year 2 was after adjusting following adjustments:

Transfer to capital reserve $50,800

Tax payable $53,140

Depreciation on fixed assets $42,750

Discount on issue of debenture written off $10,000

Loss on sales of fixed assets $1,910

Interest income $4,380

Rental income $7,200

Required: Net cash from operating activities

[Answer: NCOA = $314,450]

PROBLEM: 3B  

EG Company Ltd reported net profit after tax $632,410 for the year ended 2022; other extracted data are given below:

The following financial data were appeared on income statement:

Depreciation charged on fixed assets $32,125

Goodwill written off $22,875

Last year’s tax paid this year.

Gain on sales of investment $20,000

[Answer: NCFOA = $699,280]

EG Company Ltd

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Format of cash flow statement (Indirect Method)

Cash Flow Statement (Indirect Method)  

PROBLEM: 4A             NEB Model Question 2079 (2023)

The comparative balance sheets and income statement of AY Company Ltd are given below:

Income Statement for the Year 6 th

Other information:

(a) Sale of furniture for Rs 15,000 and purchase of furniture for Rs 100,000

(b) Dividend paid for the year Rs 14,000

Required: Cash flow statement by using indirect method [4+1+2+1]

[Answer: NPBT given = Rs 34,000; Loss on furniture = Rs 5,000; purchase of land = Rs 15,000;

CFOA = Rs 50,000; CFIA = (Rs 100,000); CFFA = Rs 65,000]

Given and working note:

Furniture Account

AY Company Ltd

PROBLEM: 4B

KL Duggar Company Ltd, the leading foods production company has following comparative balance sheet on 31 st December:

Other information for the year 2022:

(a) Machine original cost $50,000 accumulated depreciation $26,000 was sold for $10,000.

(b) Depreciation on machine during the year was $20,000

(c) Dividend paid during the year at 10%.

Required: Cash flow statement BY showing: (A) Operating activities; (B) Investment activities; (C) Financing activities; (D) Net change in cash

[Answer: NPBT = $130,000; Equipment purchased = $94,000;

CFOA = $99,000; CFIA = ($74,000); CFFA = ($20,000);

Loss = Book salvage value – Cash salvage value       

= 24,000 – 10,000      

Equipment Account

KL Duggar Company Ltd

PROBLEM: 4C

Morang Auto Works Ltd, the leading importer of Yamaha Motors Ltd, has following balance sheet on 31 st   December: [ $ /₹/Rs in thousand]

(i) The dividend paid during the year was $36,000.

(ii) Investment cost $10,000 was sold for 40% profit.

(iii) Fixed assets costing $20,000 (accumulated depreciation $8,000) was sold for $17,000.

Required: Cash flow statement by showing cash from:

(A) Operating activities; (B) Investment activities; (C) Financing activities; (D) Net change in cash

 [Answer: NPBT = $118,000; Assets purchased = $320,000; investment purchased = $15,000;

CFOA = $275,000; CFIA = ($304,000); CFFA = $149,000;

Accumulated Depreciation Account

Profit = Cash salvage value – Book salvage value    

= 17,000 – 12,000      

Plant and Machinery Account

Investment Account

Morang Auto Works Ltd

HB Enterprises has net income after tax $132,640 after adjusting following transactions:

Provision for tax (tax payable) $33,160

Interim dividend paid $12,970

Capital reserve $8,380

[Answer: NPBT = $187,150]

HG Company had following extracted balance sheet data: 

Additional information was for the Year 2:

Interim dividend paid on equity shares $15,600

Final dividend paid on equity shares @ 10%

[Answer: NPBT = $282,020]

HD Company Ltd had following extracted balance sheet data: 

Interim dividend paid on equity shares $9,300

Last year’s proposed dividend of $42,600 paid this year.

[Answer: NPBT = $155,550]

HH Trading Concern earned $98,260 after charging adjusting following transactions:

Depreciation on fixed assets $18,500

Patents amortized $7,250 

Transfer to sinking fund $27,125

Gain on sales of investment $1,670

Sublet rental income $1,200

Other information for the changes in working capital:

Increased in debtors $6,000

Increase in creditors $10,200

Decrease in prepaid expenses $675

Decrease in outstanding expenses $1,830

[Answer: CGFO = $151,310]

EB Enterprises has following extracted data:

Reserve and surplus of 2023 was after adjusting following adjustments:

Transfer to general reserve $50,600

Income tax paid $68,331

Depreciation on equipment $19,550

Franchise fee written off $10,735

Loss on sales of furniture $1,000

Income from investment $4,750

Interest incomes $344

[Answer: NCOA = $255,000]

PROBLEM: 3B

EL Company Ltd reported net profit before tax is $147,560 for the year ended 2022; other extracted data are given below:

Other information for the current year 2022:     

Depreciation on fixed assets $84,325

Trademark written off $9,570

Loss on sales of fixed assets $8,342

Interest on loan paid $4,320  

Dividend income $1,470

Profit on sales of investment $1,740

Tax paid $53,841

[Answer: NCFOA = $215,366

PROBLEM: 4A

The comparative balance sheets and income statement of EK Company Ltd are given below:

Income Statement for the year 2022

(a) Dividend paid $56,000

(b) Fixed assets purchased $400,000

Required: Cash flow statement by using indirect method

[Answer: NPBT given = $136,000; Sales of FA = $60,000;

CFOA = $200,000; CFIA = ($400,000); CFFA = $260,000]

The comparative balance sheets of ED Company Ltd for the past two years are given below:

Retained earnings of the current year 2022 is after adjusting:

Depreciation $32,000

Dividend paid $4,000

Profit for the year $16,000

Tax paid $4,000

Required: Cash flow statement (indirect method)

 [Answer: NPBT = $28,000; Asset purchase = $229,800;

CFOA = ($2,000); CFIA = ($206,000); FA = $156,000;

The comparative balance sheets of EP Corporation Ltd for the past two years are given below:

Additional information for the year 2022:

(a) Depreciate on plant and machinery by $70,000.

(b) Dividend and taxation of $50,000 each paid during the period.

(c) Trade investment was sold for $80,000 and the profit realized was credited to retained earnings.

(d) A premium of 10% was paid to debenture holders at the time of redemption of debentures.

Required: (indirect method) Cash flow statement

[Answer: NPBT = $200,000; Assets purchase = $340,000]

 CFOA = $165,000; CFIA = ($260,000); CFFA = $115,000; 

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