How to Prepare Cash Flow Statement from Balance Sheet
Understanding how to prepare a cash flow statement from a balance sheet is crucial for any business or individual looking to gain a comprehensive view of their financial health. The cash flow statement provides insights into the cash inflows and outflows of a company over a specific period, helping stakeholders assess its liquidity and financial stability. By analyzing the cash flow statement, one can determine the sources of cash and how it is being used within the organization. In this article, we will guide you through the process of preparing a cash flow statement from a balance sheet.
Step 1: Gather the necessary information
To prepare a cash flow statement from a balance sheet, you will need the following information:
1. The opening and closing balance sheets for the period you are analyzing.
2. The income statement for the same period.
3. Any additional financial statements or notes that provide further details on the company’s financial activities.
Step 2: Identify the cash flow activities
The cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities. Here’s a brief overview of each:
1. Operating activities: These are the cash flows generated from the company’s core business operations. To identify these activities, you will need to analyze the changes in current assets and liabilities from the opening and closing balance sheets.
2. Investing activities: These involve the purchase and sale of long-term assets, such as property, plant, and equipment, as well as investments in other companies. To determine the cash flows from investing activities, you will need to look at the changes in fixed assets and investments from the opening and closing balance sheets.
3. Financing activities: These activities involve the company’s capital structure, including the issuance and repayment of debt, as well as the issuance and repurchase of equity. To identify the cash flows from financing activities, you will need to examine the changes in equity and debt from the opening and closing balance sheets.
Step 3: Calculate the cash flow from operating activities
To calculate the cash flow from operating activities, follow these steps:
1. Start with the net income from the income statement.
2. Adjust for non-cash expenses and revenues, such as depreciation, amortization, and gains or losses on the sale of assets.
3. Add back non-cash expenses and subtract non-cash revenues.
4. Adjust for changes in current assets and liabilities, such as accounts receivable, accounts payable, and inventory.
Step 4: Calculate the cash flow from investing and financing activities
For both investing and financing activities, you will need to analyze the changes in the corresponding accounts from the opening and closing balance sheets. Here’s how to do it:
1. Investing activities: Add the cash inflows from the sale of assets and subtract the cash outflows from the purchase of assets.
2. Financing activities: Add the cash inflows from the issuance of debt or equity and subtract the cash outflows from the repayment of debt or repurchase of equity.
Step 5: Prepare the cash flow statement
Finally, compile the information you have gathered into a cash flow statement. The statement should have three sections: operating activities, investing activities, and financing activities. The net increase or decrease in cash and cash equivalents should be equal to the change in the cash and cash equivalents reported in the balance sheet.
By following these steps, you can prepare a cash flow statement from a balance sheet that provides a clear picture of your company’s cash flow activities. This information is essential for making informed financial decisions and assessing the overall financial health of your organization.
