In my last article, I gave you an overview of the financial statements. We looked at BQE’s Project Management and Invoicing Software. We looked at the Income Statement, Balance Sheet, and the Statement of Cash Flows.
Now I’d like to take a deeper dive into the Statement of Cash Flows.
Remember that the Statement of Cash Flows reconciles the Income Statement and the Balance Sheet. More specifically, it reconciles accrual basis net income to cash.
The Profit and Loss, or the Income Statement tells us how much money we made. The Balance Sheet tells us how much our business is worth. The Statement of Cash Flows removes all of the non-cash impact to the Income Statement. Then it adds back the cash activity that isn’t included in Net Income. One way of looking at it, is to say that the Statement of Cash Flows removes all of the “BS” from the other two statements.
In order to illustrate this better, it helps to work with an accounting file that has no data. This let’s me illustrate the impact of transactions on the Statement of Cash Flows, very clearly. This time we’ll use a product that was designed to handle the accounting only. It does not handle any of the project management functions, that we’ve been talking about. If I increase my accounts receivable, but the client doesn’t pay me, I have to subtract that from my net income to arrive at cash.
If I Contribute money into the business I have to add that money to net income to arrive at cash.
When I depreciate an asset, I have to add that back to net income to arrive at cash.
When I buy the asset, I have to subtract that from net income to arrive at cash.
Let’s look at what these examples look like on the Statement of Cash Flows, using QuickBooks Online.