Company Accounts – The Cash Flow Statement

How to read a cash flow statement

The final piece of the company accounts puzzle is the cash flow statement.

This shows us how the company is running in terms the day to day management of the flow of cash through the company.  Where the money is coming from and where it is being spent are the primary considerations.

Cash Flow Statement For Company Newstartup FY 2011 and 2012
(Figures USD) 2011 2012
Net Earnings 500,000 1,000,000
Additions to cash
Decrease in accounts receivable 5,000 10,000
Increase in accounts payable 5,000 10,000
Increase in taxes payable 30,000 50,000
Subtractions from cash
Increase in inventory (50,000) (60,000)
Net Cash from operations 490,000 1,010,00
Cash flow from investing
Equipment (100,000) (400,000)
Cash Flow from financing
Notes Payable 5,000 5,000
Cash Flow 395,000 615,000

This cash flow statement looks very healthy, the amount of cash at the end of fiscal year 2012 has increased by nearly 50% from 395,000 to 615,000.

Here we will explain the different elements of the cash flow statement.

Net Earnings is the amount of cash after tax left in the business from the previous reporting period.  We make adjustments to the cash flow based on and differences in revenue, credit transactions or expenses.

A decrease in accounts receivable means that the people who own the company money have paid of more of their debt, therefore increasing cash flow.

Increase in accounts payable infers that the company has for example purchased good on credit and therefore this is reflected on the balance sheet as a liability and on the cash flow as a increase in net sales.

Increase in inventory. This is one of the most important elements of the cash flow statement.  This shows us if the company is selling in line with its production capacity of is it is wasting cash on storing inventory for future sales.

Equipment is the amount of cash spent on equipment during the period.

Notes payable, is the amount of future loan repayments for the period.  This is important as it shows us that the company can easily cover its loan payments with the cash it has available.

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