 QuickBooks Online 2024. Statement of cash flows. Get ready and some coffee because QuickBooks is even quicker to the trigger than quick draw McGraw. Here we are. First a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our Accounting Rocks product line. If you're not crunching chords using Excel you're doing it wrong. I must have product because the fact as everyone knows of accounting being one of the highest forms of artistic expression means accountants have a requirement the obligation a duty to share the tools necessary to properly channel the creative muse. And the muse she rarely speaks more clearly than through the beautiful symmetry of spreadsheets. So get the shirt because the creative muse she could use a new pair of shoes. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com Or in our browser searching for QuickBooks Online Test Drive looking for the result that has into it.com in the URL. Selecting the United States version of the software and verifying that we're not a robot. Opening up our major financial statement reports like we do every time the reports on the left hand side were in the favorites. We're going to be right clicking on the balance sheet open link in new tab right clicking on the profit and loss once again open in the link in a new tab. Going to that middle tab closing up the hamburger. This is our balance sheet report. Let's do a range change up top bringing it back to two thousand twenty three oh one oh one two three tap twelve thirty one two three tab running it to refresh in it tabbing to the right closing up the hamburger. We're going to do once again a range change back to oh three oh one oh one two three tap twelve thirty one two three tab run it. That's the setup process we do every time we're now going to be looking at the statement of cash flows the third major financial statement report. But not one that's quite as important or one that we look at every time we do transactions. Let's open it up first and then we'll talk about that more. Going back to the first tab again we're looking for the statement of cash flows. Let's just type it in here statement of cash flows. There it is. I'm going to open that one up and let's go ahead and duplicate the tab. I'll right click and duplicate the tab so I can pull this one to the right. That's the one that we're going to be working on and we still have that first tab if we want to do some data input back to the tab to the right closing up the hamburger. Let's do one more time on the range change bringing it back to oh one oh one two three tap twelve thirty one two three tab running it to refresh it. So the statement of cash flows although it's the third major financial statement report when you think of financial statement reports we should be thinking the balance sheet income statement and statement of cash flows. However we haven't opened the statement of cash flows every time we do a data input and that's because basically when we enter any of the forms that we create journal entries with invoices the sales receipt expense form bills and so on and so forth. Those we think of as having a transaction that affects at least two accounts to general ledger accounts which will be reported somewhere on the balance sheet and the income statement. And so that's why we look at the balance sheet and the income statement to see the impact of the transactions that is primarily and most directly what are we what we are creating when we do the data input. And then the statement of cash flows we kind of think of it as if you were to build it for example from scratch then you would build the balance sheet income statement and then the statement of cash flows basically from the balance sheet and the income statement. So next question why is that why do we build it that way what is the statement of cash flows doing for us that is different than the balance sheet and the income statement. Well first you can kind of think about the statement of cash flows as though it still fits into our general rule as of all other reports other than the balance sheet and the income statement give us more information about the balance sheet and income statement. Because this is basically giving us more information you could think about as cash the bottom line here should tie into the cash account which will take a look at shortly. But really the statement of cash flows is kind of reworking mainly the income statement on a cash flow basis. And the reason we would need that is that most of the times our financial statements are on an accrual type basis. So if I go to the income statement then for example when we think about these different types of revenue recognition or these different types of accounting methods cash versus accrual for example it's not just the toggle between this little key up top. And you can't really just pick if you're going to be on a cash or accrual basis it'll depend in part on the industry that you are in has to do with timing of the income and expenses when are we recording income expenses. On a cash basis you record the income and expenses when you get the cash on income and when you pay the cash on expenses on an accrual basis you record the income and expenses when you incur the income and the expenses when you consume the expenses. Now you might think well why can't I just pick one. Well in practice it really basically depends on the industry that you are in and you can think about being on a cash or accrual basis depending or by cycle basically. Vendor cycle or expense cycle and the customer cycle or the revenue cycle. And if you just basically for example on the expense cycle if you are just using the cash of the bank feeds to record the cash outflows as expenses as they come through the bank feeds. Then you're basically already on a cash based system because and you wouldn't you would just do that if that would be the simplest thing to do. And you would be using a cash based system if on the other hand you're entering bills now you have an accounts payable involved and that's an accrual account. So now you're doing an accrual type of thing if you're tracking inventory then you're also going to have to track inventory on the books as an asset asset even though you paid cash for it so that's another generally accrual type of account. If you go to the revenue side of things if you're just recording revenue as it comes through the bank feeds with a deposit form such as you might do in gig work or something like that then you're basically on a cash based system. But if you have to invoice people now you're doing something that has a an accounts receivable which is an accrual type of account and you'll have to deal with the accrual component of it. So when you look at your balance sheet then note that the accounts that are accrual accounts accounts receivable is basically an accrual account inventory generally has an accrual component to it. Even the the fixed assets are having an accrual component and accounts payable has an accrual component to it. So that kind of distorts our revenue recognition from a cash based system on the income statement our performance statement to an accrual performance statement which is usually good for comparative purposes. And let me just the main example of that is if you look at the furniture and equipment which is something or the fixed assets which could include furniture and equipment. This is something that basically you have to still have an accrual component even if you're on a cash based system because the government the IRS if you're in the United States will require it. So even if you're on a cash system for everything else you're still going to have to if you have equipment and furniture do this accrual thing of recording the fixed assets and depreciating them. And you can imagine that if you didn't weren't forced to do that what would happen if you bought like a building of $100,000 for cash and you just expense it because you paid the cash on a cash based system that's what you would do. That would mean you would have this huge loss in the year or month that you purchased it which would look like from a performance statement you did very poorly in that year or month. But really you didn't because you're going to use the building for like 30 years into the future. So what we need to do for a comparative purposes is the accrual process of putting it on the books as an asset and then depreciating it over the useful life and so on. Obviously with accounts receivable we have to have an accrual component if you need to track accounts receivable because you're going to have to try to see if you can collect on the accounts receivable. So that's going to be necessary depending on the type of industry. However we still would like to have a cash system, a cash based statement because cash is the lifeblood of the company. So we would like to even if we have an accrual income statement which is great for comparative purposes still have a cash flow statement so that we could still see the cash flow. So that means we're going to convert in essence the income statement mainly to instead of an accrual component to a cash based component. Now you might say hey why can't I just what you could try to do is just toggle this thing over which should make it to a cash based system. And that's one method that you could try to do just to kind of get an idea of a cash versus accrual based system. It's not going to come out exact because of the rules of the statement of cash flows. But that 187012 should be you would think the operating 1896.02. So it's pretty close right if you were just to use that method. But we're going to have the whole different statement of cash flows here. We have a course on creating I mean the statement of cash flows. And if you're able to to create the statement of cash flows from a profit and loss and balance sheet then you're really understanding the accrual system. So it's it's kind of a good working tool. All right let's get into the statement of cash flows. It's a timing statement from so that means it has a range unlike the balance sheet more like the income statement type of report. So we're we're measuring performance in essence on a cash based system. We're going to have three components to it if I minimize the triangles. We've got the operating activities we've got the investing activities and the financing activities. The largest part is generally the operating activities because it's going to tie out in essence to the income statement. You can kind of think of the income statement being reworked to then make it on a cash based system instead of an accrual based system which would mean in essence instead of getting the money when the recording revenue when the invoice happened. Let's go back to my flow chart. If you if you have invoices then the cash based system is going to like remove the invoice part and basically recognize revenue when you get the payment right and on the bill side. It's going to remove in essence the bills and recognize the expense when you made the payment when the cash is going out. That's in essence what the idea would be. However, there's two formats that you can do that in the direct method and the indirect method. So you would think then that you would just take the income statement here and just rework it just like we did here going from a cash to an accrual system. So that now I have income and expenses recognized on a cash based system. This would be like a direct method having just a normal income statement but now it's on a cash based system. But usually you still have to do the indirect method when we do the statement of cash flows which is what the QuickBooks has here. Which means you're going to start with net income and back into it. One reason for that is that you get this reconciliation between net income from a cash based system and an accrual based system. We'll dig into that in a second. Then you've got the investing activities. These are cash flow related items from an investing side of things which typically doesn't just refer to the investment in stocks and bonds but investment in assets such as the property plant and equipment. The financing activities has to do with financing the flows of financing such as loans and whatnot payments of loans taking out of loans as well as the equity financing owners putting money into the company. Owners taking money out of the company in the form of draws. If it was a sole proprietorship or partnership and dividends if it's a corporation that gives us our net increase for cash. And let me pull out the trusty calculator. And so we could say okay if we had those categories one eight six one eight one eight nine six point oh two minus one three four nine five plus one five six six two point five is the four oh three six fifty two. That should tie out then to that's that's the change and there was no beginning balance here. If there was a beginning balance we would adjust for the beginning balance which would get us to the ending balance but there is no beginning balance so that's the cash. So that should tie out to what's on the balance sheet over here. Here's the balance sheet. Let me make my calculator stick. So this is where it gets a little tricky with the balance sheet because you would think hey wait that doesn't tie out it's 2001. But the undeposited funds is actually also cash which should be up here in the bank accounts. But it's not because QuickBooks wants to put it in other current assets because it acts more like another current assets in terms of functionality of the account because it doesn't connect to the bank feeds or anything. So if there's something in undeposited funds you got to remember to pick that up two oh six two point five two plus two oh oh one. That gives us the four oh six three fifty two which ties out to our statement of cash flows here. Okay let's take it one section at a time operating activities. So like I say you would think it would start with net income but net income on a cashed basis and then all the expenses on a cashed basis because I just said. Like the operating income is kind of like the income statement but we flipped it to a cash based system. But now if I look down here I have all these balance sheet accounts if the operating activities of the statement of cash flows is like the income statement. Why does it have all these balance sheet accounts instead of income statement accounts in it because we're using the indirect method and the indirect method is going to start at the bottom line of the income statement. So you can see here if I go back to the income statement accrual it starts at the bottom line one six seven six forty six of the net income and then it backs out all of the accrual things. The easiest way to back out of the accrual things is actually to look at the balance sheet for the accrual type of accounts the accounts that have an accrual component to them basically taking the difference between all balance sheet accounts. So that's what's happening if I go to my balance sheet here and I and I run this from to let's run a comparative report for the previous period and look at the dollar change and then I'll run it. So the previous period had nothing in it which is kind of lame for our purposes here but whatever so you could see if I went everything. The idea the concept would be is I'm going to take the difference between all of the balance sheet accounts except cash because cash is going to be the bottom line. And if I look at all of the changes of all of these accounts then the difference has to tie out to the difference in the cash accounts. And that's so we're just going down the line are started with with this and then this was it last year the difference is five two eight one fifty two. So we're going to take that difference and reduce the net income from it because again are all of these all of these accounts are going to be basically a cruel type of account. So we have to reverse it out in essence and you can get in and start thinking about well why is it a negative if it if it went up then we're going to reduce it because it's an asset. I won't get into the details on that if you want to dive into that more detail we have a whole course on it's really an interesting thing but you can go through each of these ones. Here's the accounts payable and we took the difference in the accounts payable reduced it the credit card the property taxes and the loan payable the loan payable. You would think possibly should be down here in the financing activities and I think the reason it's not is because it's under other current liabilities and all the stuff in current liabilities. I think they put into up top here so I don't think that's exactly right I think that's done because of the default settings of of the system putting it up up top here but in any case that gives us the net cash provided by operating activities. Now the other thing with this form that's a little bit wonky a little bit strange oftentimes when you have to create these things is that you have to change the language down here whether it be an increase or a decrease. So down here you have a decrease and it still says net cash provided by well you didn't provide it by right now because this was net cash used in. So you would think this would be a the language would change here it doesn't in QuickBooks because it's just keeping the same language whether it's an increase or decrease not a big deal. But when I was working in the counting firms they used to grill me on that all the time you didn't change the you didn't change the word here so you might then which is fine they were right. I didn't change the word but but you might want you might want to you could export it to Excel and then you could change the word there to to say it was a decrease if it was a negative but in any case I digress. There's the first one investing activities. So the investing activities is usually again not stocks and bonds although possibly it could be but rather investments from a different perspective in terms of what we're investing in to help us generate revenue that's usually going to be the fixed assets. Why is that an investment because we're putting money into the long term assets that we're going to use to help us generate revenue you know in the future is the general idea. So the money so money that went into the fixed assets and then when we sell the fixed assets they're usually going to go here you might ask well why aren't they on the income statement. Well and one way you can think about that which means it would be up in the operating activities. You can think about well what's the other side of the transaction on the balance sheet if it's an income statement transaction then you would think it would be in the operating activities. If it's not you would think it would be somewhere else investing or financing. So for equipment for example if I bought equipment with cash then the cash would be affected and the other side of the transaction would be equipment. There's no expense account that is impacted. There will be an expense account when we depreciate it and if we had any depreciation it would be up here in the operating activities. So that means there's cash flow happening here that I have to account for because I need to tie into my change in cash flow. But it wasn't cash flow that was related to revenue and expenses rather cash flow related to purchases of equipment which we're thinking of in terms of an investment in this case because we bought the equipment in order to help us generate revenue in the future. Okay let's go to the financing activities. We've got the notes payable. So they've got the long term portion of the note down here. So it looks to me like we're just populating the categories down here based on whether it's a current assets or long term asset. The long term or liability sorry current liability or long term liability. They put the current portion up here. I don't think that's right but they just put all the current portions up there. It looks like it's the idea and then the long terms are being dumped down here into financing activities. So anytime we take out the loan that would be a financing activity and anytime when we pay off the loan and what not financing activity you can think of the same concept. Is the income statement affected when we take out the loan? No because we bought the loan we got the loan we got cash went up and the other side went to the loan. No expense account. When our expense accounts impacted when we make payments there will be expenses but that'll be interest expense and if we had interest expense it would be up here on the income statement or operating activities section. And then if we took draws out or owner investments would also be down here. So if it was a corporation if we issued stock and we got money in from the owners through the selling of stocks then that would be included. If we gave money back in the corporation in the form of dividends then that possibly would be in the financing activities. And then if it was a sole proprietorship if we the owner put money into the business you would think that would be in financing and if we take the money out in the form of draws in that case you would think that would be in the financing. So it looks like the accounts that are going to be kind of dumped in here for QuickBooks will be the long term liability accounts and the equity accounts you would think. So operating equity looks funny of course or opening balance because that's kind of an account that shouldn't really be there because it's really like a starting account that's kind of ugly and should be removed. But this is the net cash provided by financing activities and that gives us the net cash increase for the period and then usually you would compare that to the prior period cash to get to the ending cash because this is the change in cash. And if you want to tie out to the balance sheet you don't want the change in cash you want the ending cash so then you would take that and compare it to the beginning balance of cash to look at to get to the ending balance of cash. That would be the general idea if this was an increase in cash you would add that to the beginning balance of cash before this year and that would give you the ending balance of cash. Okay that's the general idea. Now this statement of cash flows works pretty well it generates pretty well but you probably if you if you were getting detailed for like external reporting purposes there could be some transactions that QuickBooks might not pick up exactly well right. It might not do it properly like this this example the loan payable that might not be exactly right. You might export it to Excel and make that change and you can make it fairly easily. If you have more complex transactions like you took out this loan but possibly you didn't you didn't you didn't get the cash you took out the loan because you bought equipment with it. So that gets messy because the because the equipment is an investing activity and the loan is going to be a financing activity and these two things are kind of combined together so then you so it might be the case that QuickBooks doesn't properly record those types of transactions It's the same with the sale of of of of equipment. It's usually the equipment stuff and the financing stuff that could get messy because if you sold equipment then you usually have a pretty complex transaction related to that as well because you're going to have to sell the equipment. So the equipment is going to go down but you might not have just gotten cash for it you might have got something other than cash like a loan for it or something like that. But there's also going to be depreciation involved with the equipment and depreciation is up in the operating activities and then you got accumulated depreciation that you have to deal with. So it's a pretty complex transaction. So so if you really wanted to hone down your statement of cash flows you might use this as a baseline right and then look into those more complex transactions like sales of equipment and financing activities to see if there's any kind of adjustments that need to be made. But it's pretty good in general. And again if you look at the at the at the profit and loss you can get an idea of the similar concept of a direct method for the income statement by going to the cash. This is where that cash button is actually useful. You don't try to use the cash and accrual buttons up here to try to make it easier to be on a cash basis versus an accrual basis because what you do is you just follow whatever the concept of your industry is this best practices. However, once you have your system set up if you want to then see a cash flow profit and loss which is kind of like a direct method operating activity of the statement of cash flows. That's the proper use of that button right and now I can see basically an income statement. So now I have the best of both worlds really on the statement of cash flows for the operating activities. I've got in essence the direct method which changed all of my accounts top to bottom gave me my net income on a direct method doesn't exactly tie out to what they have here but it's pretty close and it gives me a pretty good idea. And I still have the indirect method which is the method typically required for external reporting purposes at least in the United States and generally I think everywhere why because the indirect method you can see you have this reconciliation. Here's the net income that we had on an accrual basis. Here's the difference. See I have the difference to get me the net income on the cash basis which is net cash provided by operating activities. When I do it this way it makes more intuitive sense but I don't have the reconciliation right I can't see exactly what the difference is between one or the other because I reworked every account. So this one I think makes more sense to think intuitively but this one gives you that nice reconciliation is the general idea.