Why learn how to prepare a Statement of Cash Flows?
The main purpose of the Statement of Cash Flows is to report on the cash receipts and cash disbursements of an entity during an accounting period. Broadly defined, cash includes both cash and cash equivalents, such as short-term investments in Treasury bills, commercial paper, and money market funds. Another purpose of this statement is to report on the entity’s investing and financing activities for the period.
Here is a summarized version of theStatement of Cash Flows from page 74 of the annual report of Facebook, Inc. for the year ended December 31, 2012—the year the company went public:[1]
| Description | Amount |
|---|---|
| In millions | |
| Subcategory, Cash flows from operating activities | |
| Net Income | $53 |
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | |
| Depreciation Expense – Plant Assets | 649 |
| Share-based compensation | 1,572 |
| Other adjustments to reconcile accrual basis to cash basis | (662) |
| Net cash from operating activities | Single Line $1,612 |
| Subcategory, Cash flows from investing activities | |
| Purchase of property and equipment | (1,235) |
| Purchases and sales of securities and other investments | (5,789) |
| Net cash used in investing activities | Single Line (7,024) |
| Subcategory, Cash flows from financing activities | |
| Cash Receipt from Issuance of Common Stock | 6,760 |
| Proceeds from issuance of long-term debt | 1,496 |
| Other financing (mainly tax effects on share-based activities) | (1,972) |
| Net cash used in financing activities | Single Line 6,284 |
| Net Increase (Decrease) in Cash and cash equivalents: | 872 |
| Cash and cash equivalents at beginning of period | 1,512 |
| Cash and cash equivalents at end of period | Single Line $ 2,384 Double Line |
As shown in the statement of cash flows, this statement reports the effects on cash during a period of a company’s operating, investing, and financing activities. Firms show the effects of significant investing and financing activities that do not affect cash in a schedule separate from the statement of cash flows.
Notice that the statement also reconciles beginning cash of $1.512 billion at January 1, 2012 to ending cash of 2.384 billion on December 31, 2012.
You might note that although net income using the accrual basis of accounting was only $53 million for the year ended December 31, 2012, if the company had been reporting on a cash basis, it would not have been able to deduct depreciation expense or giving shares of the company as compensation, along with other accrual items. After adjusting for these non-cash expenses and other accrual items, the actual cash generated by operations was $1.612 billion.
Also, from the financing section, of the $6.284 billion generated by selling stock to the general public, it looks like most of that was invested in marketable securities (the long-term borrowing and the purchases of fixed assets more or less balanced each other out.)
So, the statement of cash flows can tell you a lot about a company that the accrual basis income statement may not reveal.
In this module, you’ll learn how to construct and interpret this seemingly complex financial statement, and if you are doing the financial reporting for a publicly traded company, you’ll now have this impressive list of the five common financials:
- Income statement, sometimes called the P&L or statement of earning
- Statement of stockholders’ equity, that includes the statement of retained earnings
- Statement of other comprehensive income
- Balance sheet, sometimes called the statement of financial position
- Statement of cash flows
Here is a short video introduction to this topic:
You can view the transcript for “Cash Flow Introduction” here (opens in new window).
- Facebook, Inc. “Facebook Annual Report 2012.” ↵
