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What is a Cash Flow Statement?

June 9, 2015

Tax Question:

What is a Cash Flow Statement?

Facts:

A Cash Flow Statement is the part of the financial statements prepared for owners, investors, and bankers that summarizes the changes in cash flow for a defined period of time, usually the fiscal year. It is a reflection of the source and application of a corporation’s cash flow.

Discussion:

A Cash Flow Statement shows a reconciliation between the net income of a corporation and the change in the cash balance from the beginning of the period to the end of the period. The statement has separate sections which detail the operating activities, investing activities and financing activities.

  • The operating activities section converts the accounts listed on the Income Statement from the accrual basis of accounting to a cash basis. For example, amortization is a non-cash item so it is added back to the statement. Operating activities also include changes in non-cash working capital during the period such as accounts receivable, accounts payable and income taxes payable. A positive cash flow from operating activities indicates that the company is capable of self-financing its day-to-day operations while a negative balance indicates that the company is struggling to cover its cash requirements.
  • The investing activities section reports the purchases and dispositions of property, plant and equipment. If you buy new equipment, this will be reported as a deduction in the investment activities section. It also includes the purchase and dispositions of other long-term investments such as securities held for investment purposes.
  • The financing activities section reports the dividends paid to shareholders and advances and repayments made to related parties and shareholders. When dividends are paid to shareholders, this will be reported as a deduction on the statement as cash is being paid out. Advances and repayments made to debt such as mortgages and loans are also reported in the financing activities section.
 

Cash Flow Statements help owners, investors and lenders view past cash flow and predict future cash flow which helps in budgeting and preparing projections of the future financial performance of the corporation. This statement is not required for a Notice to Reader engagement, but is included in the financial statements for Review and Audit engagements – A Review versus an Audit). It is an important financial report that can be generated in most bookkeeping and accounting software.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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