 zero accounting software statement of cash flows get ready to be an office hero with zero 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 here we are in our custom zero home page we set up in a prior presentation scrolling in a bit holding down control up on the scroll wheel currently at 175% zoom in opening the demo company but doing so by selecting reset resetting the data and opening the demo at the same time we're gonna open two tabs duplicate in the tabs to put our major financial statement reports in right clicking on the tab up top to duplicate it right clicking on the duplicate a tab to duplicate it again this is the process we do every time and the middle tab accounting drop-down major financial statement report of the balance sheet and then tab to the right accounting drop-down the major financial statement report of the income statement or P&L profit and loss back to the middle tab we're now going to go to the date drop-down and open up the custom date to bring it out to 2022 the end of it and update so these are the two major financial statements and it's important to just keep on reiterating that when we're entering the transactions into the system we are doing so with the normal forms which create financial transactions to accounts being impacted at least every time the accounting equation remaining in balance and having an impact or constructing the major two financial statements balance sheet and income statement the other statements that we'll look at are going to be generally giving more information about one or multiple line items on the balance sheet or income statement now the next statement report that we can look at now is the statement of cash flows and you might be saying hey look the statement of cash flows is a major financial statement report balance sheet income statement statement of cash flows you're treating it like it's second rate here and to some degree yes I am kind of because the balance sheet and the income statement when you think about the construction of the reports you generally construct the balance sheet and the income statement and then the statement of cash flows from the balance sheet and the income statement and you can kind of think about the statement of cash flows as reconstructing the cash flows from basically an accrual basis to kind of a cash flow basis. That's a kind of a simplified way to think about it, but we're trying to get the best of both worlds here, meaning the format of accounting that we're gonna use on the balance sheet and the income statement to best accurately reflect decision-making kind of format, which is usually like an accrual format because it has better comparability on the income statement to measure performance and also have the cash flow, would be the idea, the cash flow statement. Okay, so let's right click on the tab up top and duplicate that tab again, and this time I'm gonna put the statement of cash flow. So I'm gonna go to the reports dropdown, I'm sorry, accounting, and then reports, and then we're gonna go into, I'm just gonna type in here, statement, statement of cash flow. So there it is, notice we have the direct method here, so we'll talk more about that shortly, but let's first open it up, let's change the date, hit the date dropdown, we're gonna customize that date, and let's make it from, I'm gonna go from January to December 2022, December 2000, there we go, and then I'm gonna update that, so that looks good. So we have the statement of cash flows, generally has the three categories here, the operating activities, the investing activities, and the financing activities, doesn't look like we have any financing at the moment. So you can kind of think about the statement of cash flows as giving more information on the cash line item. So in other words, at the bottom line here, you've got the cash and cash equivalents at the beginning of the period, you've got the net cash flows that we're gonna be looking at and putting together up top, and the cash and cash equivalents at the end of the period, at the 494633 negative, which should tie up to the balance sheet. If I go back to the balance sheet, it's in the liabilities because it's overdrawn, but there it is right there. But really what we're doing is we're giving the cash flows the activity that's happening. So it's a lot more detailed than really just kind of giving us the activity for the checking account because we're seeing the performance in terms of cash flow. And we break those cash flows out into three categories. The operating you can think of as similar to basically the income statement. In other words, the income statement is breaking out not really the activity of cash, but instead the activity of the equity section, right? Because if I go back to my balance sheet, we know that the assets minus liabilities equals the equity. So it's kind of like the book value or the value of the company on a book basis to the owner. And so then we got to say, well, how did we get to that equity number? So the equity is the key number there and that is the value of the company in essence. And then when we go back in time, we get more detail about what happened in the prior year with regards to the equity. We've got the net income, income minus expenses for the performance that is part of the equity section. So on a cash flow basis, we're going to be focusing in on obviously again, the cash, which is in the liability section and looking at the performance in the prior year to get us from beginning cash in essence to the ending cash. And that's, you do that, you can kind of do that with a cash account in a similar way as with the equity account because cash is like the lifeblood of the company, all of the cycles, the revenue cycle, the expense cycle go through cash. We've through all of it. So if I go back to the cash flow statement, the first part is kind of recreating or getting to cash flows, kind of on a cash basis system or converting the income statement to like a cash based system. Investing activities are not just investing from the limited sense of us investing in, say stocks and bonds, but more to an expanded sense that basically everything on the balance sheet is kind of like an investment in that we have the business in and of itself, the assets in it in order to invest in future generation of revenue. So the main things that we're investing in to generate future revenue are the assets of property, plants and equipment. So property, plants and equipment are usually going to go into the main components, buying and selling property, plants and equipment, the cash related to it and the investing section. And then the financing section is how we're financing generally the purchase, right? Of the assets and we either do that with loans. So we take out loans, which so increases and decreases in loans and the other side would be, or the other way to finances would be us, the owner putting money into the company. So those would be financing activities and then we've got our reconciliation. So those three components, operating, investing, financing are going to show us the change in the cash flows. And then if we want to tie into what's on the balance sheet, we could take those changes in the cash flows and add it to the beginning balance to get to the ending balance cash flow to tie it into the balance sheet. That's kind of how it works. So let's go into it section by section. The major section is of course, the operating activities because most of the active, the performance we do is kind of like in the operating, which would be similar to the income statement. Now, I kind of like the direct method because I think it's most intuitive method for people to use. So in other words, the income statement is on the indirect method. I'm sorry, the income statement is on an accrual basis method to some degree, depending on what kind of industry you're in. But note, if I go back to my flow chart, you can think about the accrual method that you're on either from by cycle, right? That's expensive cycle or the customer cycle. So if on the expenses cycle, you report your expenses and you just pay the expenses as they come due, possibly with the use of bank feeds, then you're basically on a cash-based system. Anyways, even though you've turned the system in zero to be accrual, you're formatting it in a cash-based system just on the forms that you are using. But even then, you're gonna have to do some deviations from a cash-based system. For example, when purchasing property, plants and equipment, or if you have inventory, those are things when we have to deviate from a cash-based system because of the huge timing differences when we consume a building versus when we buy the building. And then on the customer cycle, but if we enter a bill and have accounts payable, we have an accrual kind of system there. And then on the customer side of things or the revenue side of things, if we just record revenue when it clears the bank as a deposit, then we are in essence doing a cash-based type of system. However, if we're invoicing people, we have kind of an accrual-based system, not kind of, we have an accrual-based system. So if I go back over to here, the sales are being recorded here, for example, when we enter an invoice, even though we didn't get any cash and the expenses are being recorded when we pay, I mean, sorry, when we enter a bill, if we are entering bill, not necessarily when we paid the cash. So then on a cash-based system, you might say, well, if I'm gonna try to convert the income statement, I'm just gonna take these line items and say, just convert it to a cash-based system, record sales, not when I enter the invoice, but when I receive the payment, when I get the cash, record the expenses, not when I entered the bill, but when I made the payment. And so you can kind of reconstruct your income statement. That's what the operating section is on a direct method by just basically converting the components of the income statement, these categories, receipts from customers, kind of like revenue, payments to suppliers and employees, kind of like expenses, cash receipts from other operating activities, right? You can just convert those onto a cash-based system, and then you've got your net income in essence on a cash-based system, which we're gonna call net cash flows from operating activities. So I think intuitively, that's quite nice. However, a lot of like reporting agencies actually like what's called the indirect method. So you gotta be kind of aware of that. You might still need to do some adjustments for the indirect method. And no matter what you do, like a zero system and any accounting system can kind of give you a cash flow system that ties out. But if you have more complex transactions for financing transactions and investing transactions, you still might need to do more for reporting purposes for cash flow, right? Because you kind of back into the cash flow to some degree after you build the balance sheet and the income statement. So in any case, some reporting requirements require the indirect method because the indirect method, although it's more complex to understand intuitively, has a reconciliation between basically cash or net income on a cash basis and net income on an accrual basis. So it starts with the net income and then backs out all the stuff that's kind of accrual versus cash to get to the end result, which should be the same under the two methods. But now you've got a reconciliation to tying out net income on an accrual basis to kind of net income or net cash flows from operating activities on a cash flow basis. So that's just something to kind of be aware of. They got the direct method. I kind of like it. You might still need to do indirect method for formal reporting depending on what your needs are. Most small businesses don't need to do that. So because they're not being regulated oftentimes by entities that are requiring that. And if you do have to have a formal statement of cash flows, then oftentimes you might need to do more work on it anyways to really get it up to par. And in that case, you might be getting a review or like an audit, which that would be the kind of their risk, you know, they would be doing that as part or, you know, you'd have to get it up to par in order to for those reporting requirement purposes. Now we have a whole course on cash flows. If you can understand how to construct a statement of cash flows from a balance sheet and an income statement, you know, beginning and ending, then that you really get a good understanding of the accrual method. So I highly recommend looking at that if you really want to understand the double entry accounting system better. Investing activities. So now you've got those other activities. So if anything, if you think about the transaction and you're saying that transaction doesn't normally have any impact on the income statement, then it's probably not something that's going to be in the operating activities. In other words, when I buy property, plants and equipment, the transaction is an increase to property, plants and equipment, an asset and a decrease to cash if I pay cash for it. There's no, there's no income statement activity there. So we're not really converting the income statement. Instead we're saying this is cash flows from investing activities. We bought or sold usually property, plants and equipment, but possibly stocks and bonds in some cases. And then in the financing activities, same thing, you've got money coming in or going out for transactions that normally don't hit the balance sheet or the income statement. If I take out a loan, for example, I increase a liability. The other side goes to cash, no income statement account. So we still have cash flows, but they're not like normal operating activity cash flows, not part of the income statement. Therefore, they're gonna be under financing activities. And then if we add together the net cash flows, net cash flows from operating activities, the net cash flows from investing activities, the net cash flows from financing activities, we're gonna end up with the change in cash. So this is the net cash flows. Also just realize the terminology here is intentionally kind of vague, which is you have to do in accounting software if it's trying to automatically construct the statement of cash flows. So in other words, normally you might say here, net cash flows from operating activities. So the word from kind of indicates that you've got increases in cash flows even though you've got a decrease here. So you would think the terminology might be something like it's the decrease in cash flows, right? Instead of the increase in cash flows. And then this says net cash flows from, so net cash flows is trying to indicate whether it's going up or down. But oftentimes in formal reporting, you would say it's an increase or decrease whether or not it was an increase or decrease. And then the net cash flows usually, it might say increase or decrease in cash flows, right? But you have to say just change in cash flows to be generic so that it can flop either way depending on what your circumstances are just from the logistics of how the software is gonna work. So again, that's something that every software will have to do typically unless they get quite complex in flipping the names as those changes happen. So for formal reporting of the statement of cash flows, you typically need to do a little bit more work oftentimes. And then you've got the cash and cash equivalents at the beginning. So now in order to tie out to the cash at the end of the period, you want the cash at the beginning. So in other words, if I went back here and I went to 2021, and I say custom date range 2021 and December 31st, boom. We've got the checking account at 4, 9, 4, 5, 4, 8. So that's 4, 9, 4, 5, 4, 8. And then the change that happened, that's what we did up here. This is the activity performance statement, beginning and end. So that's the change. That's how we got from here to here. Cash and cash equivalents at the end of the period, which we just saw if I bring this up back to custom date 2022 at the end of the period. Now it's a liability. So it's down here, 4, 9, 4, 6, 33. Such a similar number that's interesting, but it's negative, but there it is. And then that's the change in cash. So that's just kind of an outline of the report. Again, if you want more detail on how to construct a statement of cash flows, it really helps you understand the accrual accounting method. But remember that your major financial statement reports you want to check every time are usually going to be the balance sheet and the income statement as you enter information into the system. And then your statement of cash flows will hopefully help you to make sure that you're not only generating revenue, but that you're liquid. You have the cash flow in order to meet the future cash obligations.