The statement of cash flows essentially tells you about cash entering and leaving a business. It’s arguably the most misunderstood and underappreciated part of a company’s annual report. After all, a business that reports positive net income on its income statements sometimes doesn’t have enough cash in the bank to pay its bills. Reviewing the statement of cash flows can provide significant insight into a company’s financial health and long-term viability.
Under Generally Accepted Accounting Principles (GAAP), the statement of cash flows is typically organized into three sections:
The end result is cash-basis net income. Companies that report several successive years of negative operating cash flows may be better off closing than continuing to incur losses.
Capital leases and noncash transactions are reported in a separate schedule at the bottom of the statement of cash flows or in a narrative footnote disclosure. For example, if a borrower purchases equipment directly using loan proceeds, the transaction would typically appear at the bottom of the statement, rather than as a cash outflow from investing activities and an inflow from financing activities.
In addition, U.S. companies that enter into foreign currency transactions customarily report the effect of exchange rate changes as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents.
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The statement of cash flows provides valuable insight about your company’s financial health. But it may not always be clear how to classify transactions. We can help you get it right.
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