Statement of Cash Flow IllustrationThe Statement of Cash Flows reconciles net income with the actual cash increase or decrease for the reporting period. The Format of the Cash Flow Statement classifies the cash activity type as operating, investing, and financing activities. Let's review Sunny Sunglasses Shop's Cash Flow Statement step by step to understand how each transaction affects cash.
Statement of Cash Flows For the Year Ending December 31, 2007 
The $41,383 as reported on the December 31, 2007 Balance Sheet represents the net change in cash for the period of 2007. 1). Operating Activities Accounts Receivable represents sales to customers on account, and not for cash actually received for the sale. Because net income includes this amount in sales and net income, we subtract this increase in Accounts Receivable for the year to determine actual cash received. Had the balance of Accounts Receivable decreased, the decrease would indicate a cash payment on the account which the Income Statement does not report, and we would add it as an actual cash receipt.
The beginning Balance Sheet for 2007 had a balance for Prepaid Expenses of $2,400. This represents insurance for the business paid for the year. The business reported the $2,400 at the beginning of the year as an asset for future use. By year end, the total expense equaled $2,400, and the asset reported on the December 31 Balance Sheet is now zero. Any prepaid expense amount represents what the business paid in cash for an asset for future use. We subtract it in cash operations since the business would not report it on the income statement until it was used or expensed, but the business already paid for it. Since the company already expensed the item during the year, the amount paid in cash and the amount reported on the income statement are equal ($2,400), and no adjustment to cash is necessary. Accounts Payable represents inventory or other items purchased for which the business did not actually pay cash. Rather, the business promised to pay in the future by purchasing items on account. This amount is added back to cash. Inventory purchased in the operations section decreased cash. Since part of the inventory was purchased on account, we add this amount back to cash. 2). Investing Activities The Statement of Cash Flows is formatted based on purchases or sales classified as investing and financing activities. This means that even if an asset is purchased with financing, the entire amount is shown in the investing section, and any amount financed is shown separately to determine the actual cash outlay. For example, The Purchase of an Automobile for $12,800 and Land for $20,000 represent a total cash outlay of $32,800 in the investing section. 3). Financing Activities The Statement of Cash Flows includes both assets purchased in the Investing Section, as well as amounts used to finance purchases in the finance section. Since the company actually borrowed $8,800 to finance the purchase of the automobile reported in the investing section, and $18,000 to finance the purchase of Land also reported in the investing section, these amounts are added back to cash since they do not represent cash paid for the assets acquired. The company actually paid a total of $2,000 for the land, and $4,000 for the automobile, which represents the net cash paid for the investing and financing activities of these two items. Finally, the financing section also includes any amount the owner invested into the business. Sunny started the year by investing $50,000 into his new business. This represents actual cash received for the year. The total cash received and paid during the year equals the total net change in cash for the year of $41,383.
|
