Some Tips on Understanding The Statement of Cash Flows

statement of cash flowsBesides the Statement of Assets and Liabilities, or Balance Sheet, and the Statement of Income and Expenses, simply known as the Income Statement, there is the Statement of Cash Flows, which every business should have. It is of paramount importance in the financial health of a business, because it organizes and spells out your cash flow in direct terms. All three statements, in fact, work together to give you the whole picture of your business finances, but the Statement of Cash Flow is your “bottom line” document.

What Is Reported On Statement of Cash Flows

The Income Statement shows the business’ profit and loss, from which are then subtracted the Cost of Goods, leaving you with the Gross Profit. When General and Administrative Expenses are taken out of this, you are left with the Net Income. All this remains on the Income Statement, but the Net Income is also reported on the Statement of Cash Flows, at the top.

How The Statement Will Help Your Business

The Statement of Cash Flows will help business owners to figure out the whereabouts and direction of their Net Income. This can be a terribly useful tool at tax time, to explain any shortage of cash with which to pay taxes. On the flip side, you may inexplicably have extra cash in the bank, when your business is losing money. The Statement of Cash Flows is there to explain the discrepancy—in numerical terms, it plays detective and shows exactly where any hiccup might have occurred that caused the false surplus or deficit.

The Balance Sheet

The Balance Sheet will ultimately show how the Net Income (first stated on Profit and Loss) has been adjusted to reflect cash flow from, or to, Operations, Financing or Investments, depending on the savvy of the business owner. The importance of this cannot be overstated—it may ultimately decide not only how successful the business might be, but in which tax bracket the business owner may find him or herself! Cash Flow differs from other statements by pinpointing the creation and behavior of cash in the business’ finances. It cannot predict what risks you’re willing to take with your cash, such as appreciating assets or depreciation assets. The Cash Flow Cycle is more of a yardstick for current business financial health and future movement.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.

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