How to Prepare a Cash Flow Statement From a Balance Sheet
A cash flow statement is a financial summary of a business's inward and outward movement of cash. A cash flow statement represents three core activities: operations, investments and financing. Operating activities are the day-to-day functions of the business, such as buying and selling of goods or services. Investment activities involve acquisition of fixed assets, such as land and machinery. Financing activities involve raising capital through short-term and long-term loans. All this information may be derived from a balance sheet, which is a financial summary of the assets and liabilities of a business.
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Instructions
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Determine the cash flow of the operating activities by adding all the current assets items in your balance sheet. Inventory, debtors, cash in the bank and liquid cash should be the main current asset items in your balance sheet. Inventory and debtors represent the amount of money that your business is expected to receive within the foreseeable future while cash in the bank and liquid cash is the money that is already in the possession of your business.
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2
Deduct the expenses on the purchase of fixed assets from the income from the sale of fixed assets to determine the net cash flow from investing activities. Treat expenses on fixed assets as total cash flow of investing activities if no fixed assets were sold.
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Treat income from the sale of fixed assets---plus the appreciation value or less the depreciation value---as the total cash flow from investing activities if no fixed assets purchases were made. Appreciation is the percentage gain on a fixed asset such as land as a result of revaluation while depreciation is the percentage loss of value on a fixed asset such as a motor vehicle as a result of aging.
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4
Calculate the total value of the short-term loans (loans payable within the next 12 months) such as bank overdrafts from the balance sheet. Deduct these from inflows of current liabilities such as capital and cash raised from the sale of shares to determine the total cash flows from current liabilities.
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5
Calculate the total value of the long-term loans (loans payable after the next 12 months) from the balance sheet. The total will constitute the cash flow from non-current liabilities. Add the total cash flow from current liabilities to the total cash flows from the non-current liabilities to get the total cash flow from financing activities.
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Add all the total cash flows from the operating activities, investing activities and financing activities. Proceed to determine the net cash flow by deducting the taxes and interests paid by your business.
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Tips & Warnings
Simplify the process of preparing the cash flow statement by splitting the operating activities, investment activities and financing activities before embarking on any other procedure.
Account for depreciation or appreciation of fixed assets. Failing to do so would lead to inaccuracy of the net cash flow figure.
