Learn how to do statement of cash flows: A complete step by step guide

Have you ever encountered a statement of cash flows? For once, you might have thought of banging your head on the table. Especially, if you fail to get the right value after numerous calculations. It feels like a nightmare.

Maintaining a cash flow statement is a time-consuming process. Such a hustle might have made you wonder isn’t there an easy guide for your assistance. Don’t worry. We have got you covered. In this article, we will provide you with six important tips regarding how to do statement of cash flows for you.

The cash flows are the calculations done based on the received (inflow) and transacted (outflow) elements. The transactions recorded within this statement must tally the entries recorded in the income statement and the balance sheet.

Undoubtedly,“How to do statement of cash flows,” is not a one-go process.

 Note. The initial calculations should be made with a keen observation. Or else you will end up making errors. So, hold onto your horses while dealing with the figures. 

There are three columns that cash flow statements deal with, including investment, finances, and operating activities. Make sure you skim through the data and record entries rightly into these columns.

Without further ado, let’s learn “how to do statement of cash flows.”

Assembling of the basic data and documents

Get all the documents ready before you move forward with maintaining a cash flow statement:

  • You must be aware of the previous year’s statement of cash flows. You can skip this information, but having the previous data available will help in adjustments for the current period.
  • You must know about the ending and opening balance of the balance sheet. It is essential.
  • A comprehensive income data should be attained to maintain the current year’s cash flow statement
  • Availability of the current period’s statement of changes in equity should be ensured
  • Records of transactions should be checked and updated for the current period.
  • Other documents, such as, investment documents, legal department files, lease contracts, and memoranda from meetings, should also be obtained.

Assembling of the basic data and documents

Get all the documents ready before you move forward with maintaining a cash flow statement:

  • You must be aware of the previous year’s statement of cash flows. You can skip this information, but having the previous data available will help in adjustments for the current period.
  • You must know about the ending and opening balance of the balance sheet. It is essential.
  • A comprehensive income data should be attained to maintain the current year’s cash flow statement
  • Availability of the current period’s statement of changes in equity should be ensured
  • Records of transactions should be checked and updated for the current period.
  • Other documents, such as, investment documents, legal department files, lease contracts, and memoranda from meetings, should also be obtained

Evaluate amendments in the balance sheet

  • Maintain three columns:
  • 1st column: Subject of caption in the balance sheet.
  • 2nd column: Subject balance from the closing balance sheet.
  • 3rd column:  Subject balance from opening balance sheet.
  • Calculations should be made with close observation. So, make sure you add a plus (+) sign with assets and a minus (-) sign with equity and liabilities.
  • Now you have to calculate the difference using a formula (opening balance sheet – closing balance sheet). It is important to know the changes in the balance sheet.

Add the amendments of the balance sheet in the statement of cash flows

  • Use the previous year’s cash flow statement to your advantage. Consider the headings as the same and make changes for new entries if needed.
  • After examining the changes in the balance sheet, add the data to the cash flow statement.
  • Continue with the addition of changes until you are finished with adding information. Ensure that the statement of cash flow appears with two columns (changes in the balance sheet assigned and titles of individual cash flow captions). You can now check the accuracy of your data by adding two columns. But make sure the total is zero. If not. Then recheck your calculations.

Use of total comprehensive income for making adjustments

It is important that you only look for non-cash items for now. You must:

  • Extract the non-cash entries from the statements of comprehensive income statements and standard income statements. Examples of such transactions include income tax expense, barter transactions, change in revaluation reserves, and many more.
  • Adjust the non-cash entries in the statement of cash flows.
  • Finally, after making all the necessary adjustments, make sure to check the total of adjustments. Balancing both sides of adjustments is necessary.

Use of other data for making adjustments

This one is somewhat the same as the 4rth step. But this time you have to look up other data as well. Read through the following steps:

  • Check out other non-cash adjustments
  • Make sure to add the entry regarding the hidden data in the cash flow statement
  • If the transaction is not recorded, then make adjustments as you did in the 4rth step. Note. The total should always be a zero.

Prepare the statement of cash flow and recheck it once again

You must recheck all the entries recorded within the cash flow statement. Now, you have the first (titles and headings), second (balance sheet changes), and third column (adjustments) in your statement of cash flows.

Before you start working on the third column of your cash flow statement, remember to:

  • Add the column from 2 till X.
  • Check if the calculations seem rational or not. After attaining the numbers look into your accounting records (horizontal check and balance)
  • Recheck payments in cash for PPE (property plant and equipment). Is it the same as you calculated earlier? If not. then there is an error.
  • Lastly, the vertical balance should be zero. If you have attained a zero balance, then you are on the right track.

Now, you know,“how to do statement of cash flows.” Do follow the mentioned tips for maintaining your cash flow statements updated.

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