Net and Gross Cash Flows

Learning Outcomes

  • Differentiate between net and gross cash flows

Gross cash flows don’t exist in the operating portion of the cash flow statement. GAAP (generally accepted accounting principles) and IFRS (international financial reporting standards) for foreign companies, require us to disclose the gross cash flows for the investing and financing sections of the cash flow statement.

Gross cash flows essentially include the purchase price in cash of a new piece of property or equipment, and the cash gain of the sale of a piece of property or equipment.

So if a company purchased $25,000 of new equipment and sold $10,000 of equipment, the net cash flow would be $15,000. But in the investing and financing sections, we need to keep those separate. It is still important to note the difference in balance netted, then backing it out to the gross calculation!

Here is an outline of how noncash balance sheet accounts affect the investing and financing sections of your cash flow statement:

If the account balance increases If the account balance decreases
Non-Current Assets (Investing Activities)
Property, Plant, and Equipment (P,P,&E) Subtract Add
Long-term investments Subtract Add
Loans to others Subtract Add
Liabilities and Equity (Financing Activities)
Bonds payable Add Subtract
Common stock (our own company) Add Subtract
Retained earnings * *

*Retained earnings will need more analysis

So you will notice, this chart looks at the overall change in the balance, but to calculate the gross cash flow by looking at the detail in all of the each of the accounts to fill out the cash flow analysis to meet the requirements of GAAP and IFRS reporting requirements.

Practice Questions