Where Did All My Money Go? Understanding the Statement of Cash Flows
If you're like most
QuickBooks users, you rely on the Profit & Loss Standard report to monitor
how your business is doing. However, you may have noticed that it rarely, if
ever coincides with what's in your bank account (hint: it's not supposed to). An
overlooked, yet valuable report, is the Statement of Cash Flows. The Profit
& Loss Standard (P&L), provides only partial insight into the health of
your business - what you earned and spent. The Statement of Cash Flows explains
your change in cash on hand.
Cash versus Accrual
Unlike some accounting
packages, QuickBooks allows you to run most reports on either the cash or
accrual basis. Cash-basis means that transactions don't appear on your Profit
& Loss statement until either your customer pays their invoice or you pay a
vendor (or employee). So, if you enter a bill in QuickBooks to be paid later,
the expense won't immediately appear on a cash-basis P&L. Similarly,
invoices that you send to customers won't immediately appear on a cash-basis
P&L. The expense appears when you write a check to the vendor, and the
revenue appears when the customer pays their invoice. Accordingly, cash-basis
reports don't necessarily report a company's true financial performance. You
could have a stellar looking Profit & Loss Report, but a bunch of unpaid
bills in QuickBooks. For that reason, many accountants prefer that business
owners use accrual-basis reports.
Accrual-basis reports
recognize the effect of every transaction on your P&L immediately. Customer
invoices appear on accrual- basis P&L reports as soon as you save the
transaction, as do unpaid vendor bills.
Accrual-basis reports
provide a much better picture of where the business stands, but can make it
harder to understand your current cash position. However, a cash-basis P&L
isn't the panacea for managing cash flow. Your business has many transactions
that affect your Balance Sheet instead of the P&L, such as loan payments or
owner distributions. (Remember, the Balance sheet tracks assets, liabilities,
and equity.) The Statement of Cash Flows explains your change in
actual cash balance based on all your cash transactions - whether they affect
the Balance Sheet or P & L, making it a great addition to Balance Sheet and
P & L. (Audited financial statements are required to show all 3 reports.)
So let's take a closer look.
The Statement of Cash
Flows
Suppose your cash
balance at the beginning of your fiscal year was $100,000, and today it is
$75,000. The net income figure on your P&L won't give you the full details
on why your cash balance decreased, but the Statement of Cash Flows will. To do
so, choose Reports > Company & Financial > Statement of Cash Flows.
This report
automatically defaults to This Fiscal Year-To-Date, but you can choose another
time period if you wish. If this is your first time, I recommend starting with
1 month, (no more than 1 quarter), until you are more comfortable with reading
it.
Your Statement of Cash
Flows report will include up to three major sections. (Don't worry if your
report only includes one or two of these sections - sections appear only when
you had relevant transactions during the report period.
1. Operating
Activities
2. Investing Activities
3. Financing Activities
2. Investing Activities
3. Financing Activities
Operating Activities
The Operating
Activities section of the Statement of Cash Flows recaps activities related to
running your business. This section will always start with Net Income (comes
from the bottom line of your accrual-based P & L), followed by an
Adjustments section. The Adjustments add or deduct to your Net Income. For
instance, Net income is $112,999 but the Net Cash from Operating Activities is
$42,584. The Statement of Cash Flows identifies the $70,415 difference. Let's
take a look at a few of the items:
Accounts Receivable (-$71,759):
During the report period we sent invoices to our customers, of which $71,759
remain unpaid. Because we included these invoices as income in our P & L
but have not actually received the payment, QuickBooks deducts them
from the Net Income from the P & L.
Inventory Asset (-$17,354):
Amounts that we spend on inventory don't become part of Net Income on our P
& L until we've sold the items. At that point QuickBooks posts the expense
to Cost of Goods Sold, and reduces our inventory account accordingly. But in
this instance, we paid cash to purchase our inventory, so we deduct that amount
is deducted on our Statement of Cash Flows.
Remember: The purpose
of the Statement of Cash Flows is to reconcile our Net Income with the actual
change in our cash account(s). Thus non-cash activities, such as unpaid
customer invoices or amortized prepaid expenses get subtracted or added from
Net Income, so that you can get a clear picture of where cash went during the
report period.
Accounts Payable ($13,537):
We've entered bills into QuickBooks totaling $13,537 that we haven't paid yet.
While we deduct it on the accrual P & L, because we have not actually spent
the money to pay those bills, we add that cash back in.
Federal Withholding: ($1,364):
We've withheld income tax from employee paychecks in QuickBooks totaling $1,364
but we haven't paid it yet, so we add that unpaid
"deduction/liability" to our cash.
Want to know where
QuickBooks got these numbers? Simply double-click the number in question to get
a more detailed report.
Investing and Financing
Activities
As you look at the
Statement of Cash Flows, you may also see one or two other sections:
Investing activities
may include owner contributions as a source of cash.
Financing activities
will show borrowing on a line of credit or other loan as a source of cash,
while loan repayments (excluding interest) will appear as uses of cash. In the
end, you'll see exactly what caused your cash balance to increase or decrease
during the report period.
Organizing the Statement
of Cash Flows
QuickBooks makes an
educated guess at what accounts in your Chart of Accounts should appear on the
Statement of Cash Flows. You may want your accountant to review this report to
see if you need to change what accounts appear and in which section on the
report. If there needs to be any change(s), simply click the Classify Cash
button then enter a checkmark in the appropriate column for the account(s) in
question.
So next time you want
to figure out why your bank balance and cash-based P & L don't seem to
agree, take a look at your Statement of Cash Flow. I will admit, to those who
don't have accounting backgrounds, this may look a little confusing the first
time or two (or three) that you look at it, but hopefully this article will
help you understand it and you can get a better handle on your cash flow. If
you have questions, feel free to contact us or your accountant.
Muir & Associates
helps businesses use their Intuit products more efficiently and more
effectively so businesses can focus on their business and make more informed
decisions. We provide sales and support services. Monica Mitchell Muir has been
helping businesses with their QuickBooks products since 1996.
Article Source: http://EzineArticles.com/expert/Monica_Muir/599617
Article Source: http://EzineArticles.com/7132996
Where Did All My Money Go? Understanding the Statement of Cash Flows
Reviewed by Unknown
on
12:27 PM
Rating:
Reviewed by Unknown
on
12:27 PM
Rating:
