A cash flow statement, called the statement of cash flows in US accounting standards, is the financial statement that reports the cash a business took in and paid out over a period, sorted into three classifications: operating activities, investing activities and financing activities. The statement reconciles the beginning and ending totals of cash, cash equivalents and restricted cash, so it carries the total the business opened the period with through to the total it closed on. Whether the period was profitable is a separate question, and a separate statement answers it.
One paragraph of the standard sets the requirement out. A statement of cash flows for a period shall report net cash provided or used by operating, investing, and financing activities and the net effect of those flows on the total of cash, cash and cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents during the period, and it shall report that information in a manner that reconciles beginning and ending totals of those amounts (FASB Accounting Standards Update 2016-18, ASC 230-10-45-24).
Cash equivalents are short-term, highly liquid investments both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value from interest rate moves, and generally only investments with original maturities of three months or less qualify (FASB, Statement of Financial Accounting Standards No. 95, paragraph 8). That Statement has since been superseded. It was one of the then-existing non-SEC accounting and reporting standards superseded on the effective date of Statement No. 168, which kept only a short list of named Statements authoritative until each was integrated into the Codification (FASB Statement of Financial Accounting Standards No. 168, paragraph 15).
What This Statement Answers That the Other Two Cannot
Profit and cash are different measurements, and only one statement carries the second. An income statement reports what was earned and incurred, which is why a period can close in profit with less money in the bank than it started with. That gap opens under accrual accounting, and what each of the other two statements does answer is set out in balance sheet vs income statement. This statement is where the gap becomes visible line by line.
The Three Sections, and What Belongs in Each
Investing activities are the flows from buying and selling long-lived and financial assets. The standard’s list of investing outflows runs from disbursements for loans the entity makes and payments to acquire debt or equity instruments of other entities, through payments at or near the time of purchase for property, plant, and equipment and other productive assets, to payments made soon after an acquisition date to settle a contingent consideration liability (FASB Accounting Standards Update 2016-15, ASC 230-10-45-13).
Financing activities are the flows between the business and the people who fund it. Payments of dividends or other distributions to owners belong here, including outlays to reacquire the entity’s own equity instruments, and so do repayments of amounts borrowed, other principal payments to creditors who have extended long-term credit, and payments for debt issue costs (FASB Accounting Standards Update 2016-15, ASC 230-10-45-15).
Operating activities take everything else. The standard closes its list of operating outflows with all other cash payments that do not stem from transactions defined as investing or financing activities, and gives payments to settle lawsuits, cash contributions to charities and cash refunds to customers as examples (FASB Accounting Standards Update 2016-15, ASC 230-10-45-17).
The operating section may be presented by the direct method or the indirect method, both landing on the same subtotal, as the operating cash flow formula sets out.
A transaction with no cash in it belongs in none of the three. Converting debt to equity, acquiring an asset by assuming a directly related liability such as a mortgage to the seller, and exchanging one noncash asset for another are the standard’s examples of noncash investing and financing transactions (FASB Accounting Standards Update 2016-15, ASC 230-10-50-4).
The Total the Statement Now Reconciles To
The total at the bottom of the statement is wider than cash and cash equivalents, and it has been since the standard was amended. The statement explains the change during the period in the total of cash, cash and cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents, and the total amounts of cash and cash equivalents at the beginning and end of the period shown on the statement have to be the same amounts as the similarly titled line items or subtotals on the balance sheet at those dates (FASB Accounting Standards Update 2016-18, ASC 230-10-45-4).
Two consequences follow for a client that holds restricted cash. Moving money between an unrestricted account and a restricted one is not an activity at all, because transfers between cash, cash equivalents and amounts generally described as restricted cash are not part of the entity’s operating, investing or financing activities and are not reported as cash flow activities (FASB Accounting Standards Update 2016-18, ASC 230-10-45-5). And where those balances sit in more than one line item on the balance sheet, the entity presents or discloses the line items and amounts, which have to sum to the closing total shown on the statement of cash flows (FASB Accounting Standards Update 2016-18, ASC 230-10-50-8).
What the standard does not do is tell you what restricted cash is. The Master Glossary does not include specific definitions of restricted cash or restricted cash equivalents (FASB Accounting Standards Update 2016-18, Basis for Conclusions paragraph BC9), so which balances go into the total is a judgment the preparer makes and the workpapers have to support.
A client holding cash in a foreign currency has one more line in that reconciliation. The statement of cash flows shall report the effect of exchange rate changes on cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents balances held in foreign currencies as a separate part of the reconciliation of the change in the total during the period (FASB Accounting Standards Update 2016-18, ASC 830-230-45-1). That effect sits outside the three activity sections, which is why the sections on their own do not always account for the whole change.
A Worked Example
Say a client closes a year on the amounts below. Amounts subtracted are shown in parentheses.
Net cash provided by operating activities 186,000
Net cash used in investing activities (140,000)
Net cash provided by financing activities 24,000
--------
Net increase in cash, cash equivalents
and restricted cash 70,000
Balance, beginning of year 215,000
--------
Balance, end of year 285,000
Tie-out to the balance sheet at the same date
Cash and cash equivalents 265,000
Restricted cash included in other assets 20,000
--------
Total 285,000Three things have to hold at once. The sections, plus the effect of exchange rate changes on any cash held in foreign currencies, account for the period change; the period change carries the opening balance to the closing balance; and the closing balance equals what the balance sheet reports in its cash lines at that date. A statement where any one of the three fails is an error, not a presentation choice.
Where a CPA Firm Meets It
The statement goes out in the year-end financial statement package with the balance sheet and the income statement, and it is built last, because it is assembled from the closed trial balance and the movements behind it rather than written directly. For one class of client the standard names the package outright, and a complete set of financial statements of a not-for-profit shall include a statement of financial position as of the end of the reporting period, a statement of activities and a statement of cash flows for the reporting period, and accompanying notes to financial statements (FASB Accounting Standards Update 2016-14, ASC 958-205-45-4).
The review points are the ties rather than the prose. The closing total has to agree to the balance sheet, every restricted balance folded into that total has to be identified and disclosed, and the opening total has to agree to last year’s issued statement. Cash itself is proved separately, and that work is bank reconciliation.
What It Is Confused With
A cash-basis income statement is not a cash flow statement. Restating a client onto the cash method rewrites the income statement itself, which is a different job with its own consent rules, covered in the accrual to cash adjustment. This statement leaves the accrual statements exactly as they are and reports cash beside them.
A forward cash forecast is not one either. A 13-week cash flow forecast projects receipts and payments that have not happened yet and gets judged on whether the balance it predicted turned up. This statement reports a period the books have already closed on.
Free cash flow is not a line on it. Measures built afterwards from the operating subtotal, free cash flow being the common one, sit outside the statement and are defined by no standard.
Common Questions
Operating activities, investing activities and financing activities. Read strictly, there is a fourth block underneath them, the reconciliation of the beginning and ending totals of cash, cash equivalents and restricted cash, which is required in the same paragraph that requires the three sections (FASB Accounting Standards Update 2016-18, ASC 230-10-45-24). It is not an activity section, which is why the usual count stops at three.
There are not three types of statement. There is one statement with three activity classifications inside it, and those classifications are almost always what is meant. What does come in more than one form is the operating section, which may be presented by the direct method or the indirect method, and both land on the same subtotal, as the operating cash flow formula works through.
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