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Cash Flow Statement Example

See Also:
Cash Flow Statement
Statement of Financial Accounting Standards (SFAS)
What is GAAP?
Daily Cash Flow Forecast
Prepare an Investor Package

Cash Flow Statement Example

For example, Saundra has started providing angel investment to promising start-up businesses. Operating under the name Angelco, she is using the wealth she built in her professional career to provide a chance of success for up and coming Entrepreneurs. Saundra also is not afraid of the returns she will make if one of her portfolio companies were to succeed and reach capitalization.

Saundra has a job which requires constant due diligence. She must constantly monitor the companies she has invested in to ensure the professionalism with which she personally conducts business. As a result, she must constantly monitor financial statements. One such statement of monumental importance is the cash flow statement. Saundra survives, in part, through her skills of cash flow statement analysis.

Recent Changes of Balance Sheets

First, Saundra wants to know how recent changes to the balance sheets of her companies affect cash and similar assets. To do this she looks to the most recent cash flow statements which were sent to her. Upon inspection Saundra finds that three of her five companies are performing well and cash is increasing as income in the fledgling companies begins to outpace costs.

On her fourth company she does not see this result. Saundra understands that this could be the result of any number of reasons; slow growth, one-time problems, or poor management. Saundra has set a policy of allowing a grace period for problems to be rectified. Beyond this period, she will have to step in and replace current managers with her own team.

For her fifth company Saundra comes to the conclusion, after looking through her files, that she has not received a cash flow statement. She fears she may have to get tough with these founders but continues her analysis.

Monitor Financing, Investment, and Operational Performance

Saundra also wants to monitor the financing, investment, and operational performance of her companies. Again, she looks to the cash flow statement for this. Saundra, once again, is impressed with how her first three companies are controlling these actions. For her fourth company. she sees the core problem. They have purchased equipment at a price higher than average to the market. She notes that she must contact her managers to correct their mistake. With any luck, the equipment can be returned and purchased at a lower price, fixing both financing and investment issues in this business. She, of course, could not monitor this information with her fifth company.

Cash Flow Statement

Saundra has used the cash flow statement effectively because of her knowledge into the importance of the statement. Her experience combined with her analytical nature allow for effective monitoring of the big 3 financial statements: cash flow statement, income statement, and balance sheet.

Cash Flow Statement Example, Cash Flow Statement

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Cash Flow Statement

See Also:
Financial Ratios
Cash Flow After Tax
How to Create Dynamic Cash Flow Projections
Steps to Track Money In and Out of a Company
EBITDA Definition

Cash Flow Statement Definition

The cash flow statement definition is a financial statement that shows a company’s cash inflows and cash outflows over a period of time. The cash flow statement is one of the most important financial statements of a company. The balance sheet includes an asset account labeled “cash.” The statement of cash flows shows how the company’s operating, investing, and financing activities affected the cash account during the fiscal period. In conclusion, use the statement of cash flows to analyze the financial health of a company.

Cash Flow Statement Explanation

Cash flow statements divide a company’s activities into three categories, including the following:

  • Operating activities
  • Investing activities
  • Financing activities

Operating activities refer to the company’s core business operations. Whereas, investing activities refer to changes in long-term asset and investment accounts. Financing activities refer to changes in debt and equity accounts. Furthermore, the statement details the cash inflows and outflows for the accounts in each category over the course of the fiscal period.

The bottom line of the cash flow statement, which accounts for the net cash inflows and outflows of all accounts during the fiscal period, must equal the balance of the cash account on the balance sheet.

If you’re struggling to identify your company’s economics, then download the free Know Your Economics Worksheet

Cash Flow Statement: Direct Method VS. Cash Flow Statement: Indirect Method

There are two ways to prepare the operating activities section of a cash flow statement, including the following:

  • The direct method
  • The indirect method

Apply these methods only to operating activities. Always prepare investing activities and financing activities the same way. Therefore, preparing the operating activities section of the cash flow statement either way yields the same results. Furthermore, the indirect method is required by industry regulations, so companies always report cash flows using the indirect method. However, if they so choose, they can also report cash flows using the direct method.

The direct method shows cash inflows and cash outflows for each of the operating activities. The indirect method, on the other hand, makes a series of adjustments to the company’s net income in order to account for the affects of noncash transactions recorded using accrual accounting. Both methods give the same result.

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Cash Flow Statement, Cash Flow Statement Definition

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Cash Flow Statement Template

A cashflow statement template can be found here:S.C.O.R.E. template gallery

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Bank Reconciliation

See Also:
How to manage your banking relationship.
Which Bank to Choose?
Is It Time To Find A New Bank?
5 C’s of Credit (5 C’s of Banking)

Bank Reconciliation Definition

The bank reconciliation definition is the settlement of records between the balance per company financials and the balance per the bank statement. The process of accounting bank statement reconciliation is essential because of the many timing differences and errors in the recording process between two parties. When effectively implemented it assures that the bank as well as the business have relevant financial statements.

Bank Reconciliation Meaning

Bank reconciliation means reconciling financial statements which are owned by both the business itself and the bank statement. Without bringing these 2 records together the process of bank reconciliations would not bring value. From here each account is checked with records to assure a purchase date, income or expenditure, notes or additional needs, and more. This part, specifically, is where many differences arise. The cause of these may include bank deposit and work hours, policies and procedures for both entities, and more. Due to the different record keeping methodologies an alignment must be made to assure that each party has an operable understanding of the financial state of the company.

Bank reconciliation methods and procedures are focused on attaining adjusted cash balances which can be assembled into statements for both the bank and the associated business.

To avoid fraud while performing cash reconciliation, delegate this task to an employee who has no other connection with company cash.


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Bank Reconciliation Method

To begin the bank reconciliation method, enter bank and company balance on a schedule. This will create the initial foundation for the process to proceed. It is important to include the previous bank reconciliation form, if any, to establish differences between current records and this. Once completed, the process moves on to find differences in the accounts of the current period.

Next, look for deposits in transit – any deposits not yet included in the bank forms. These are deposits recorded by the company which are not yet in the bank records. Compare the bank statement deposits with the business’ internal deposit register. Add these to bank statements to form two equal records: one for the bank and one for the firm itself.

Then, find outstanding checks – any checks issues but not yet paid. These are checks written by the company which have not yet been fulfilled by the bank. Compare bank statement listings for paid checks with checks issued by the business under the cash payments journal. Deduct these from the bank records.

Now, find any errors. An example of one such error would be a returned check recorded as $50 but is actually in the amount of $60. Bank errors, when corrected, effect the adjusted balance of company records. The inverse is the case for company errors.

Finally, compile any final changes. These can include fees, interest, and other additional notes.

Complete the bank reconciliation format in this order to cover all important issues. A solid policy must be in place for bank reconciliation statements to be useful.

Bank Reconciliation Example

For example, Minnie is the CFO for Debt Collect LLC, a privately held debt collections company. Debt Collect is in good financial condition and regularly keeps up with their accounting work. Today, Minnie’s task is to review the bank reconciliation process.

Collecting Information

Minnie begins by collecting the relevant information. She sends a memo to all company accountants instructing them to make any final changes which effect overall company financial statements. After some time, she has all of her necessary records.

Performing the Reconciliation

Minnie then sets down to perform her reconciliation. She enters both bank and company balances on a schedule. She also compares this with her previous reconciliation form.

Minnie notices deposits are not at the same level. She quickly corrected this when she accounts for deposits in transit. Finally, she has reconciled the forms, and she moves on.

Minnie then accounts for outstanding checks. Upon examination, her work reveals a major problem. Her cash payments journal is much higher than that of the bank. She looks further to discover a very high level of bounced checks. Further research shows that debt holders, convinced by company contact, are sending checks. The problem is that they are not sending fulfillable checks. After looking at company policy, she prepares some procedure changes which should prevent the company from sending non-collectible checks.

Minnie completes her bank rec with no additional problems. She is satisfied by her analysis because it yielded results that will show her to be one of the great minds of the company. She looks forward to presenting her ideas to the board of directors and helping her employer.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

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Balance Sheet Definition

See Also:
Chart of Accounts (COA)
Working Capital Analysis
Quick Ratio Analysis
Current Ratio Definition
Financial Ratios
Common Size Financial Statement
Contra Asset Account

Balance Sheet Definition

The balance sheet is a financial statement that shows a company’s financial position at a point in time. The balance sheet format comes in three sections: assets, liabilities, and owners’ equity. The assets represent what the company owns. Then the liabilities represent what the company owes. Finally, the owners’ equity represents shareholder interests in the company. The value of the company’s assets must equal the value of the company’s liabilities plus the value of the owners’ equity.

Balance Sheet Equation

This balance sheet formula forms the basis of the statement which is also known as the accounting equation.

Assets = Liabilities + Owners’ Equity

Balance Sheets Explained

There are four basic financial statements: balance sheets, income statementsstatement of cash flows, and statement of owners’ equity. Of the four, the balance sheet, also called the statement of financial position, is the only one that applies to a specific point in time. The others cover financial activity occurring over a period of time. That’s why the balance sheet is considered a “snapshot” of a company’s financial condition. Typically, you prepare the balance sheet’s accounting monthly or quarterly.

The three sections of the balance sheet consist of line items that state the value of each account within that section. There is no universal format for the balance sheet, so each company’s balance sheet will look somewhat different. This makes balance sheet analysis more difficult than with GAAP compliant reports. However, the basic equation shown above must always apply.

Balance Sheet Example

Jake owns an equipment rental company called Equipco. Jake’s company has been steadily growing. Due to this, Jake is interested in receiving a bank loan to finance some additional equipment purchases. He needs to know what his total dollar amount of assets and liabilities are so that he can meet the requirements and preferences of his banker. To do this Jake asks his bookkeeper for the most recent copy of his balance sheet.

Jake is excited to learn that he can qualify for his bank loan. To begin, his total assets value is at an acceptable level. Jake also has enough owners equity to satisfy his bank on the corporate level. Surprisingly, Jake finds that he does not have too many liabilities to qualify. This concern was, as he believed, his major obstacle to earning the loan. According to Jake’s banker, his balance sheet ratios have everything in order to receive his loan. All from one statement!

Balance Sheet Template

A balance sheet template free for download and review is available at the S.C.O.R.E. Template Gallery.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

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Auditor

Auditor

In accounting, an auditor is a certified public accountant (CPA) who performs an objective examination of a company’s financial statements and internal controls. They evaluate the validity and reliability of the data and confirms whether the financial statements were prepared in accordance with the rules of GAAP. Furthermore, there are two types: an internal auditor and an external auditor. They summarize the results of the audit in an audit report, also called an accountant’s opinion.

Internal Auditor, External Auditor

There are two types of auditors: internal and external. An internal auditor is an employee of the audited company. Whereas, an external auditor is not an employee of the audited company.

Audit Report

An auditor summarizes the results of the audit in an audit report. Then, the audit report states the their opinion of the validity and reliability of the audited company’s financial statements and other relevant data. Include the audit report in the audited company’s annual report.

An accountant’s opinion may be qualified or unqualified. If the opinion is unqualified, then the auditor concluded that the data are valid and reliable and the financial statements were prepared in accordance with the rules of GAAP. If the opinion is qualified, then the auditor concluded that the data may not be valid or reliable and the financial statements may not have been prepared in accordance with the rules of GAAP. Furthermore, a qualified opinion often warrants further investigation of the audited company’s financial statements and accounting systems.

Audit Definition

In accounting, an audit refers to the objective evaluation of a company’s financial statements and internal controls. It checks the validity and reliability of the data. Then it confirms whether the company prepared its financial statements in accordance with GAAP.

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auditor, external auditor, internal auditor

See Also:
Audit Committee
How to Control Annual Audit Fees
Managed Sales and Use Tax Audit Programs
Future of the Accounting Workforce

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Audit Scope Example

Audit Scope Example

Ely is an auditor for the IRS. His work, some of the most technical for any forensic accountant, involves looking deeply into a company to find errors which may lead to prosecution. By doing this, Ely is preventing the company from any financial foul-ups that could lead to fraudulent information being shared. He is now tasked with finding the reason for recent tax payments.

The company Ely is auditing is a major food processing plant. This food company has had a history in the past of financial record “mistakes,” which explains the reason for the IRS being quick to investigate a discrepancy. This company, paying much less than IRS estimated taxes, may face a penalty. Thus the company sends Ely to see the reason for this discrepancy.

As Ely is working he takes on massive amounts of documents. He will have to sift through countless financial statements, as well as procedural documents in order to draw a conclusion on a large auditing matter. For this project he will have a very deep audit scope: he must find the reason through almost any means necessary. Because federal taxes are taken very seriously in the United States, Ely is given the authority by the IRS to request any documents or evidence that could make his decision making process run more smoothly in a legal way.

Ely Finds Something

As he is working, one of Ely’s assistants finds something; an account which should have more money than it does. With large company’s this is not uncommon because large sums of money must be moved and transferred at a moment’s notice in order to retain balance in the company’s ledgers. However, Ely is not completely convinced that unintentional error is the cause for the discrepancy. Ely scales deeper to find the cause: a company employee has been stealing funds. Though the company itself is proven to be fully compliant their records have been altered by this corrupt worker. Ely is able to help the company recover the funds and see that the employee pays for his crime. Each party is pleased with the audit, except for the employee who caused the problem.

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See Also:
Audit Scope

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Disclosure of Accounting Changes

See Also:
Accounting Principles
Probable Losses
Subsequent Events
Business Segments
How to Make Dramatic Changes in Business
Planning Your Exit Strategy
Percentage Completion Method
What Your Banker Wants You To Know

Accounting Changes

Accounting changes and error corrections are the switch from one principle of accounting to another – like with inventory and recognition of revenue. Error corrections come from an accounting change in estimates, such as accounting changes in depreciation method for assets or how it might record the company uncollectible accounts. For example, a company might decide that it needs to switch to straight line depreciation from an accelerated method. This makes it easier and in line for tax purposes. Companies might also decide that a better way of accounting for its inventory is to adopt the Last in First out (LIFO) method; instead of a First in First out (FIFO) method.

Disclosure of Accounting Changes

Regardless of the accounting change, when a company adopts a new method of accounting, GAAP requires companies to disclose these changes in the financial statements. Whenever the company is writing its notes to inform the (potential) investor, it must announce the specific change first. Then it is required to announce the impact that this change will have upon the company’s income and the balance sheet.

Accounting Changes Example

Jimbo Slice works for a toy manufacturer by the name of Awesome Toy Co. The economy has recently gone through a downturn and the company expects that it will not receive a larger amount of its accounts receivable because many of its customers are on the verge of declaring bankruptcy. Jimbo has decided that a change in accounting estimate is needed in regards to the estimation of bad debt expense. At the year end, Jimbo must list this change in estimate on the financial statement and its effect on income which is most likely a reduction.

Accounting changes can either be an obstacle or an advantage for your company. Download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

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