 In this discussion, we will discuss the discussion question of list and describe the steps to creating a statement of cash flows. If we see a discussion question or essay question like this, clearly we are talking about the statement of cash flows. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. If we don't know exactly where to start, we may just want to define what the statement of cash flows is, what its use is, how it fits into the other financial statements. And of course the statement of cash flows is going to be one of the major financial statements and part of the financial statements being balance sheet income statement, statement of equity, statement of cash flows. It's going to measure the change in cash over time. So it's going to be an activity based statement looking at cash flows. Cash is inflows and outflows over a time period. So now we're going to list the steps to describe how to create the statement of cash flows. Now if you see this in a book problem oftentimes they're going to actually have like list the four steps or the five steps or the 10 steps to create a statement of cash flows and that could kind of throw us off because we start thinking well I need to be very precise here I need to have exactly five steps or four steps or 10 steps to create the statement of cash flows. But don't let that throw you off basically we just need to go through the process of the statement of cash flows and the steps whatever steps are laid out are kind of arbitrary that's just the recommended steps to create the statement of cash flow. There may be more or less we can break down the steps into probably a hundred steps if we wanted to if we wanted to get very detailed in the types of steps we have or into very broad steps. So don't get bogged down on if the question asks you for a specific number of steps then just go through the process that's what I would recommend. So in the statement of cash flows what are we going to do to create it then? We're typically going to have our tools that we're going to need to do so that could be a step one we're going to put together what we need. Typically we're going to make the financial statements all other financial statements before the statement of cash flows including the balance sheet income statement of equity. So we'll probably have we want to have those ready and prepared and then we'll have the income statement that we're going to need. So we're going to need the balance sheet. We'll need the income statement and any added information that we'll need. So like we want access to the GL and stuff like that that we're going to need for certain accounts especially related to financing and investing activities. So we want to gather all that information that would be a step. And then we're going to go through and take the comparative balance sheet and typically make a worksheet from it. That worksheet will be at the next step that we'll basically have. We will have the balance sheet accounts for one period. The balance sheet accounts for the next period. So the current period versus the prior period. And then the new thing we'll do on the worksheet will be that we're going to subtract those two out and have the difference. So we want to find the difference, the change in every balance sheet account. And we can format that in different formats. I recommend formatting it in like a debit and credit type of format like a trial balance format. But in any case, what we're going to do is we're going to take the balance sheet accounts for one period, the current period, compare them to the prior period, look at the difference they change in each balance sheet account. That's going to be the major tool that we're going to use in order to create the statement of cash flows. Then I would set up the statement of cash flows outline, which will include three categories, the operating activities, investing activities, financing activities. And typically we're going to take our worksheet and we're going to look through all those changes and try to find a home for them in our statement of cash flows within the sections operating, investing, and financing. The goal of the statement of cash flows is to find the change in cash. So that's going to be on our worksheet. The change in cash is probably the first place we can start and say, that's where we're going. Typically then we'll go through each line item on our worksheet looking at every difference in every balance sheet account and trying to determine where that difference can fall or be categorized within the statement of cash flows. In other words, is it an investing activity, a financing activity, or an investing, operating, investing, or financing. And then we'll basically find a home for all of the activities on our change statement from our worksheet to the statement of cash flows. Once we do that, once we find a home for every change in the statement of cash flows, we should tie out to the change in cash flow statement. So that should give us the information we need. Now we're going to have to tweak that a little bit for usually financing activities and investing activities. So we're going to have to go through financing activities and investing activities and see if there are any changes that need to be made, meaning if we bought something like equipment or sold equipment or if there's changes in the equipment account, we're going to have to look through all the detail in the equipment account. Did we purchase equipment? Did we sell equipment? And we're going to have to adjust that account for the activity that happened. So we'll need that detail. We'll need to go through there and find the detail. If there's a change in something like a note payable or something in the financing activities, we're going to have to go through the GL and look at what the actual changes were. Did we take out a new loan? Did we take out multiple loans? Did we pay back loans? And again, we're going to have to go through those and see exactly what happened, make any adjustments to the statement of cash flows that we need to make. So that's going to be a step we'll have there. Then we'll have the statement of cash flows should be lined up. And our change in the statement of cash flows is really what we're looking for, but it's not the bottom line of the statement of cash flows. The change in the cash flow, the activity that happened over time, is what the major components of the operating financing and investing are geared to show us. But we want the bottom line to be ending cash. So once we find the change in cash flows that ties out to our worksheet, we're going to add to it the beginning balance for cash, which we would get from the balance sheet of the prior time period. And that'll give us the ending balance in cash, which is the amount reported on the balance sheet. So then we can check that the balance sheet account on the balance sheet ties out to the statement of cash flows bottom line, bottom line number. So those two should match. So we want to check that those two items match. Once we have the statement of cash flows created, then we want to look through and see if there's any non-cash items as well so that we would have a note for the statement of cash flows that report non-cash items. And those would be things like if we purchased equipment and financed it or something like that, we want to make sure we have the notes for the non-cash items related to the statement of cash flows.