How to Create Construction Statement of Cash Flows

Cash flow is very important in the construction industry.

The statement of cash flows is one of three reports presented in a company's financial statements; the other two being the balance sheet and the income statement. The statement of cash flows shows how changes in balance sheet items impact the cash position of the company. Most companies present their cash flow statement using the indirect method, which reconciles net income to ending cash in three distinct sections: operating activities, investing activities and financing activities.

Instructions

1. Complete the operating activities section. Start with net income and add back depreciation, amortization and changes in operating assets and liabilities to arrive at the net cash flows from operating activities.

2. Complete the investing activities section. Investing activities are purchases and dispositions of property, plant and equipment, loans made to or received from customers or suppliers and certain costs related to mergers and acquisitions. Add these items together to arrive at net cash flows from investing activities.

3. Complete the financing activities section. Financing activities include inflows of cash from investors and creditors, as well as outflows, such as dividends or the repayment of a loan. Add these items together to arrive at net cash flows from financing activities.

4. Add the subtotals computed in each step to arrive at the net change in cash.

5. Add net change in cash to beginning cash to arrive at ending cash.

6. Verify ending cash matches the amount reported on the ending balance sheet.

Tips & Warnings

• Because depreciation and amortization are non-cash expenses, they are added back to net income because they have no impact on operating cash flow.

• When an asset account increases, it consumes cash and appears as a negative item on the statement of cash flows. For instance, assume accounts receivable increased $100 during the period. This is $100 of cash consumed to fund customer's accounts with the company. On the other hand, if accounts receivable decreases by $200, customers contributed to an increase in cash and the $200 will appear as a positive item on the statement of cash flows.

• Liabilities function in the opposite manner as assets. Increases in liability accounts provide cash inflows that help fund a company's operation and will appear as a positive item on the statement of cash flows. A decrease in a liability is a cash outflow that will appear as a negative item.

• A construction firm's operating cash flow is an important indicator of the company's ability to service new debt, make new investments and pay dividends to shareholders.

• Returns on investments in property, plant and equipment are monitored to gauge how efficiently a construction firm manages its capital.

• The size of the construction firm will largely determine the complexity of the financing activities section of the statement of cash flows, with smaller firms typically having less complex financing arrangements.

References

• "Intermediate Accounting"; Donald Kieso, et al.; 2011