Cash Flow Statement Example

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The cash flow statement is a statement (report) of flows (both in and out of the business) of cash.

There is a common saying in the business world:
Cash is king.

This saying is popular because cash is the lifeblood of the business. Without it, one cannot pay bills, expand the business by purchasing assets. One cannot pay employees. As the business owner, one can't even pay oneself!

The cash flow statement is a key accounting report. One could show the most fantastic performance according to the income statement, with huge profits, and yet have nothing left in the bank. In this situation the business would not survive. How could this occur? It could occur if all your sales have been made on credit. And it could occur if additionally you weren't monitoring the cash flows of your business.

In real life this extreme situation would rarely occur, but this example serves to explain that the cash situation of a business is key. And the cash flow statement, which shows us what the business has been doing with its cash - provides vital information.

Like the rest of the financial statements, the cash flow statement is usually drawn up annually, but can be drawn up more often. Also note that it covers the flows of cash over a period of time (unlike the balance sheet that provides a snapshot of the business at a particular date).


The format of a cash flow statement is:

*Dividends are cash payouts to people who have bought shares in a company. It is similar to drawings in a small business in that the owner is getting a payout (drawings is the owner withdrawing some of the cash that he first put in the business).
**Proceeds means cash received.

Cash can flow in two directions – either coming in to your business or going out. Cash coming in to your business is shown as positive amounts, whereas cash going out from your business are shown as negative amounts (in parentheses).

The statement is divided into four parts. The first is the cash flows relating to your operations – the core activities of your business. This includes cash receipts (cash received) from your customers, cash paid to suppliers and employees, interest received or paid and tax paid.

The second section is the cash flow from investing activities. Investing (in the context of the cash flow statement) means the spending of cash on non-current assets. Thus investing activities mainly involves cash outflows for a business. We also include cash inflows in this section relating to the sale of a non-current asset that we have already invested in. Thus, the cash received this year from selling equipment that was originally bought (invested in) three years ago, would also be included in this section.

As investing activities mainly deal with cash outflows (buying non-current assets), the total of this section is usually a negative.

Purchases of assets are put under two different categories: additions or replacements.

Additions means purchases of additional assets in order to expand the business.

Replacements do not involve expansion but rather refer to an asset being purchased to replace an old or obsolete (no longer used) asset.

Financing activities is the third section. Financing is the source of the cash that we will be using to invest in non-current assets. It is where we get cash from. Thus financing activities mainly involves cash inflows for a business.

Financing can come from the owner (owners equity) or from liabilities (loans). We also include cash outflows in this section that relate to financing that we originally obtained. Thus the repayment of a loan (in part or in full) falls under financing activities (as a cash outflow), as the loan served as finance for the business originally. Similarly drawings may also be placed under this section, although it can also be placed under the operating activities section if the business so chooses.

As financing activities mainly deal with cash inflows (receiving cash from shareholders or lenders), the total of this section is usually a positive for cash flow.

The final section comprises the net cash increase or decrease for the period and the cash balance at the beginning and end of the period.

The cash flow statement for George’s Catering (the example we have been using throughout) would look as follows:

Remember, the cash flow statement shows flows of cash, not income and expenses.

Whereas income could be on cash or on credit, cash receipts from customers would only be cash.

Our accounting equation for George’s Catering looked as follows at the end of the period:

The closing balance of the bank account corresponds to the answer we calculated in our cash flow statement.

Just like the income statement and balance sheet, the cash flow statement can also be drawn up in budget form and later compared to actual figures. These budgeted figures would be drawn up based on actual figures from past years, but taking into account any expected future changes in cash flows. The budgeted figures for the cash inflows and outflows (and the way these figures were obtained) would be explained or justified in additional notes to the cash flow statement.

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