A cash flow statement is one of the three most important financial statements; the other two are a profit and loss report and a balance sheet. A cash flow statement indicates the source of finance and its expenditure and can be used to analyze timing, amount and predictability of future cash flows. The statement can be used in budgeting, too. A cash flow statement is divided into three sections of cash used in operating, investing and financing activities. Financing activities include outside sources of funding such as contributions and loans.
If your business or not-for-profit organization receives contributions from restricted or unrestricted donations, you must treat them as revenue and gains. According to the Financial Accounting Standards Board, you should treat a donation and its sequent expenditure as separate since they are different accounting items. You must record contribution and non-cash donations received as operating expenses or rename and address them under reclassification section. You must not book donated assets when they are meant for scientific or educational research.
Your financiers may promise in writing or orally to contribute assets to your business or organization in the future. A donor may pledge an asset with a condition such as the return of the asset if an intended occurrence fails to happen. You must list such pledges as refundable or as a liability until the event happens and record the conditions or their removal. On the other hand, you should list unconditional pledges in the period of commitment.
Endowments and Non-cash Items
When making a cash flow statement, you should treat contributions to endowments or for other long-term needs without restrictions as financing activities and not operating activities. Similarly, you cannot classify non-cash gifts such as contributions of stock of land as operating activities because operating activities did not produce this kind of asset. You must obtain a written acknowledgement from the donor of non-cash assets amounting to $250 or more and support it with a description of the items and estimation of their values.
Positive and Negative Entries
When recording sources of external funding such as a contribution into your business or organization, you should indicate changes according to income and expenditure in the form of negative and positive amounts. For instance, you must record as a positive amount the injection of cash or assets owners contribute since it leads to an increase in working capital. In addition, whenever your business uses cash in form of declaring and paying dividends, your cash should indicate a negative flow.