Documents Needed To Prepare a Statement of Cash Flows

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Three document cornerstones of any business are the income statement, the balance sheet, and the statement of cash flows.

Of the three, the statement of cash flows may be the most important because it's the one document that tells you whether you're going to have the money you need to run your business. It describes the flow of funds in and out of your business in the given accounting period and shows you where the business is trending—what's working well and where improvements are needed.

Key Takeaways

A statement of cash flows helps you monitor the working capital coming in and out of your business over time.
To prepare a statement of cash flows, you need to prepare your income statement and two balance sheets first.
After compiling these documents, you can prepare your statement of cash flows by accounting for your non-cash expenses, making appropriate adjustments for gains or losses on sales of assets, and other calculations.

The Difference Between the Balance Sheet and Statement of Cash Flows

Sometimes business owners at the beginning of their careers find the differences between these documents a little confusing, especially the balance sheet versus the statement of cash flows.

Essentially, the balance sheet is a static document. It gives you a snapshot of the business at a given point in time—its assets, liabilities, and owner's equity. It doesn't say anything about how the business is trending, just that this is where it is at this particular moment.

Note

Having both documents are essential because a statement of cash flows provides information on which aspects of the business are improving.

The statement of cash flows, on the other hand, is dynamic—more like a video showing you how the business is changing over time. Income, for instance, may be trending upward and wages or materials costs may be trending upward as well. This tells you what you need to do next to assure the continuing success of the business.

How to Develop a Cash Flow Statement

Before you can prepare a statement of cash flows, you'll need to prepare two other accounting documents, the income statement and the balance sheet.

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The Income Statement

For a specified accounting period, the income statement shows how much money you took in—your revenue—and what your expenses were. The difference between the two is your gross profit.

The income statement should be prepared as often as you need the information. Most businesses require either a weekly or monthly income statement.

Note

Some businesses—casinos are an extreme example—may need to prepare an income statement daily.

Here's what a DJ's monthly income statement might look like:

GrandMaster Local Guy's Income Statement

for the Month Ending August 31, 2022

Revenues
Sales of CDs	$470.00
Income from Clubs	$7,030.00
Total Revenues	$7,500.00

Expenses
Cost of CDs Sold	$150.00
Travel Costs	$700.00
Equipment Rentals	$2,500.00
Equipment Repairs	$900.00
Total Expenses	$4,250

Gross Profit (Total Revenues Minus Total Expenses): $3,250

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The Balance Sheet

The next document you'll need to prepare is the balance sheet. Again, the name of the document gives you an idea of what a balance sheet shows: the balance between your assets and liabilities.

The balance sheet, by establishing the difference between all company assets and all company liabilities, gives you a snapshot of the worth of the business on a given date.

Here's a simple example that shows the essence of the balance sheet document:

GrandMaster Local Guy

Balance Sheet

as of August 31, 2022

Current Assets	Amount	Current Liabilities	Amount
Cash	$17,500	Notes payable	$5,000
Accounts Receivable	$3,000	Accounts payable	$1,200
CD Inventory	$900
Total Assets	$21,400	Total Liabilities	$6,200

Equity	$15,200
Total Liabilities & Equity	$21,400

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Developing Comparative Balance Sheets

At this point, you're almost ready to prepare the statement of cash flows. Before you can do that, however, you're going to need not just one balance sheet, but two: one for the previous accounting period and the other one for the present period you've just prepared.

Why? This is because you are looking for changes from one accounting period to the next. Is revenue up or down? What about expenses? How does that affect your company's net worth? Comparing the earlier balance sheet with the later balance sheet tells you where your business is heading.

Note

The cash flow statement is all about changes in the company's cash position as shown by comparing the balance sheets for the two periods.

Preparing two balance sheets (or comparative balance sheets) connects directly to the next step: the development of the statement of cash flows.

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The Statement of Cash Flows

You're now ready to prepare the statement of cash flows. The basic steps you'll take include:

Stating your net income for the period
Accounting for your non-cash expenses
Making appropriate adjustments for gains (or losses) on sales of assets
Noting changes in all current assets (that is, the difference between the earlier and later balance sheet entries)
Accounting for changes in liabilities (the difference between the earlier and later balance sheet entries)

Frequently Asked Questions (FAQs)

How often do you need to develop a cash flow statement?

In some cases, accounting professionals recommend that you prepare a cash flow statement every month because, for many businesses, monthly billings are usual, and operating expenses—such as rent and wages—are often paid monthly. In other circumstances, quarterly cash flow statements may work.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

Accounting Tools. "How To Prepare A Cash Flow Statement."
Harvard Business School. "How To Read & Understand An Income Statement."
Harvard Business School. "How To Read & Understand A Balance Sheet."