 QuickBooks Desktop 2023 statement of cash flows. Let's do it within 2-its. QuickBooks Desktop 2023. 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 QuickBooks Desktop, sample rock castle construction practice file provided by QuickBooks going through the set of process we do every time maximize in the homepage to the gray area. The view dropdown, noting we have the height icon bar and open windows list checked off, open windows on the left hand side open, then go into the reports dropdown, company and financial, opening up the P and L profit and loss range and the change in 010124 to 123124 January to December. Customize it, fonts change for 12, okay, yes, okay. Then we're gonna go to the reports dropdown again, company and financial this time, the big balance sheet. We're gonna change the dates this time with the dropdown looking at this fiscal year, which is 123124, customize that report, fonts and the numbers to change it to 12, okay, yes, okay. There's the set of process we do every time. Looking at the major financial statement reports that being the balance sheet and the income statement. This time we're gonna be looking at the statement of cash flows, which is another major financial statement report. And you might have been asking as we've been going through our practice problems, why do you just open up the balance sheet in the income statement or profit and loss and you neglect the other main financial statement report of the statement of cash flows. That's because the balance sheet and the income statement are generally the reports that we think of constructing first on whatever basis we are using, generally the accrual basis. But remember, you may still be on a kind of like a cash basis depending on the type of industry you are in and how you're entering data into the system. Let's recap that because it will be important when we look at the statement of cash flows and why we have the statement of cash flows, noting that if we just look at the revenue cycle or customer cycle, if you had a system where you're waiting till something clears the bank, for example, using bank feeds before you record it as income, you are in essence on a cash-based type of system. If you're just entering the create sales receipts, say you have a register, possibly in a food truck type of situation, you're still in essence on a cash-based system because you're recording the revenue at the same point in time that you're getting paid. If however you're in the kind of business that you need to bill someone or invoice them for work done in the past, expecting payment in the future, then you're on an accrual-based system when you're using, in essence, this invoice. No matter what system you are using, we're gonna use these forms to construct the balance sheet and the income statement as our main two reports. Now the statement of cash flows then is gonna usually take what we have already constructed on the balance sheet and income statement and redesign it so that it's on a cash flow type of basis. So the easiest way to kind of think of the statement of cash flows is to compare it to our performance report, which is going to be the profit and loss report, which again is in essence on an accrual basis if we're using accrual components, such as invoices, when we're entering the data into the system, and then try to think about, well, what if we were to convert the income statement, the performance report to a cash-based system? That's in essence kind of what we're doing with the statement of cash flows, attempting to get the best of both worlds, the better comparability that we get with an accrual-based system, allowing us to be comparing month to month, year to year, without the kind of distortions that go into place when you have simply a cash-based system, when it's not appropriate. For example, if you bought a large piece of equipment and you just expensed it because you bought it with cash and it was a $100,000 piece of equipment, it's gonna make your net income for whatever period that you bought it look a lot lower than the previous period. So the comparability gets kind of messed up. If we use the accrual concept, we would put it on the books as an asset and then depreciate it over when we use that item, and that would make the comparability on a performance standpoint better. However, we also wanna see the cash flow because the cash flow is gonna be important as well. That's why we have the statement of cash flows. So from a construction standpoint, if you were to build the financial statements, for example, if you were to do this in Excel, and we do have courses in Excel to kind of demonstrate this concept, you would first do the financial transactions and use that to create the general ledger, use that to create a trial balance. The trial balance would then be used to create the balance sheet and the profit and loss. And then typically, we're gonna use the balance sheet and profit and loss to construct the statement of cash flows, basically just reorganizing the data on a cash flow basis. Okay, so we're gonna go to the reports dropdown. Statement of cash flows can be found in the company and financial. All the way on the bottom down here, the statement of cash flows, the third major financial statement report. Now note that all other reports, I wouldn't really call financial statement reports. The main financial statement reports are the balance sheet, the income statement, or profit and loss. And then the statement of cash flows, which is still kind of like a supporting report in that it's gonna be adjusting the data. And then all the other reports that we have are typically gonna be expanding on some line item, usually on just the balance sheet and the income statement, or the profit and loss report. So let's go ahead and customize this report to make it a little bit larger on the fonts and numbers, changing the font size up to 12, okay, yes, and okay. So the statement of cash flows will typically have three parts to it. Let's go ahead and minimize everything first and try to build it up as we go, as we saw with the other two reports. So I'm gonna collapse everything first. And so it usually has these three components to it. It's gonna have the operating activities, the investing activities, the financing activities. That's gonna give us the net cash increase or the change in the cash. Notice here, it's actually a decrease because it's a negative. So sometimes these terms, you could call it change for a generic term so that it would be right, whether it be an increase or a decrease, but in any case, and then we got the cash at the beginning of the period to get the cash at the end of the period. So the end of the statement of cash flows, the 67, 8, 19, 29 should match what's on the balance sheet. If I go back to the balance sheet, notice it's a 65 here. You might say, well, what's wrong? That's because remember that undeposited funds is really a cash account and they put it in the other area, I believe. So if I was to say 65379.29 plus the undeposited funds 2440, then we've got 67, 8, 19. Statement of cash flows is the 67, 8, 19, 29. So in that way, you can kind of think of it as the statement of cash flows is expanding, giving you more detail on the cash account, but it's really giving you more detail than that. It's really trying to give you the information from an operating investing and financing standpoint on a cash flow basis, as opposed to basically on an accrual basis. So the first component or section of the statement of cash flows is usually the longest section and the most complex one to understand, that's the operating activities. Now the operating activities you can in essence think of as kind of like the income statement, but you're gonna convert the income statement from a cash flow basis, I'm sorry, from an accrual basis to a cash flow basis would be the general idea. But even that is a little too simplified because if we were to do that, you would think that you would go to the profit and loss and every time we had income up top, we would convert that income to, instead of recording it when on an accrual basis, we would record it on a cash flow basis. In other words, if I go to the homepage, instead of recording income when I have an invoice, if I'm using invoices, I would record income when I've received the payment because that's when we got the cash. So that would be the difference in a timing difference. There's a timing difference between an accrual basis and a cash basis. So you would think I would go line by line, income recorded on a cash basis as opposed to an accrual basis, expenses record them on a cash basis as opposed to an accrual basis on the expense side of things. If I go to the homepage, if I'm using the bill item, this bill would record the expense, but not when we paid it at that point in time because we entered it into accounts payable. So it would then record the expense instead of here, it would record it here when we actually paid for the expense. Again, you might be on a cash basis because you might just be paying with bank feeds and entered into the system that way and not using an accrual component, but just know that's when the difference, that's when you're gonna have a timing difference between a cash flow and a accrual basis. So then if I go to the statement of cash flows, that's what you would think would happen, but we don't typically do it that way. I'm back on the profit and loss. We could do it that way and that's called a direct method of doing it, but oftentimes we're gonna do it with an indirect method. That's the method that QuickBooks is going to be using here. And there's a couple of reasons for that. One is that that gives us a reconciliation between the net income on a cash flow basis and the net income that is on an accrual basis. So we're gonna start with the end result and reconcile or back into the cash flow, basically net income number, which would be the operating activities on the statement of cash flows. The other reason is because for reporting purposes, they usually require the indirect method, even if you use a direct method, so which those two reasons are kind of tied together, the reason that they prefer this indirect method of starting with net income and then tying it out to recording the difference, showing the change from the net income on an accrual basis on the income statement or profit and loss, to that on the statement of cash flows, the net cash provided by operating activities, in essence, net income on a cash flow basis kind of, is because it gives you that reconciliation. It shows you the difference, whereas if you were to reconstruct it, you don't have that exact tying out from one to the other, so it's a nice added component. It's more theoretically easy to see if you were to do a direct method, but usually you're gonna see an indirect method and you'll have to use an indirect method for reporting purposes if you have to report statement of cash flows. Note, like a small business, oftentimes doesn't need to report a statement of cash flows because you don't need it for taxes, generally. Usually you're gonna do your taxes with an income statement, but if you get a larger company and possibly if you want a loan, they might ask for a statement of cash flows if you're looking for a loan, and corporations as they get larger are gonna need to have reporting requirements. If you can have an audit, you're gonna need a statement of cash flows, and of course for internal use, if you can understand the statement of cash flows, it gives you the best of both worlds because it gives you the comparability of the income statement on a performance measure as well as the cash flow to help make sure your cash flow is doing well, cash flow being important because cash is the lifeblood of the company. The cash is involved in every cycle of the transaction, so the cash flow is still an important component. Okay, so on the operating activities, we start with the net income, that comes from the income statement, and then we've got the adjustments to net income. So this can be a little bit confusing on how this whole thing is basically constructed. If you can understand how to construct the statement of cash flows, then really that's a great exercise for understanding the double entry accounting process. We do have a course on constructing the statement of cash flows. Also note that the statement of cash flows in QuickBooks will make some assumptions to kind of construct the statement of cash flows, and you might have certain transactions, such as disposing equipment or something like that that had depreciation on it where you would need to do some more adjustments to it to really get the statement of cash flows dialed in exactly correctly, but it gives a pretty good baseline of it. So the typical way you're gonna construct the statement of cash flows would be that you would look at the balance sheet and create a worksheet generally from the prior period, 1231, 23, for example, and then the current period. Let's do a comparative balance sheet and just take a look at that if I was to say, let's take the 010124 and look at the prior period, which will be last year and look at the dollar change. So I'm gonna say, okay. And so now we've got 2024, the current year, and then the prior year, and then we can take the difference between each of these items. Now you might be saying, why would I take the difference on the balance sheet when I'm trying to construct a statement of cash flows for the operating section, which you just said was kind of like the income statement. And the reason for that is because if I go back to the balance sheet, remember the balance sheet is the double entry accounting system, assets equal liabilities plus equity, or assets minus liabilities equals equity. The equity down here represents kind of the book value of the company as of a point in time. The income statement is the distance, how we got from one point to the other. So one way we can analyze that distance is we can say, well, why don't I take the difference from where we stood last year as of a point in time equity section minus this year, that difference is the 119, 154, 64, which mainly is gonna be net income typically, although there could be investments from the owner and there could be draws from the owner. But, and then, and so I can see the difference between the two as the change. And then I can try to look at my accrual accounts up top and say, well, let's look at all of them. If I take the cash account, that's gonna be the bottom line change. So that's what we're kind of reconciling to. In other words, if I go to the statement of cash flows, you've got the cash here, which is gonna be meaning you've got the activities, the flows from operating, financing and investing. And then you've got the net increase for cash, which is this negative 3068. So if I go to the balance sheet, that would be then, let's take this change here, the 12, 743.65 minus this 15, right there for undependent positive 15, 812.08. So there's the 3068. So this change, this difference in the cash flow is kind of what we're reconciling to. But we don't wanna leave it just there. That's why they add to it the beginning balance, which is gonna be this 52635.64 plus the 18252.08. And that gives us our 70 statement of cash flows, 788772, so that we can arrive at the cash flow at the end of the period, because that's the thing that's easiest to tie in to the actual balance sheet would be the general idea. If I go back to the balance sheet, then I can take the differences in all the other accounts. Now the accounts receivable is an accrual account, meaning if you were on a cash basis, you wouldn't have accounts receivable. If you didn't invoice clients, you would have no increase in accounts receivable. So this then represents, this change represents the timing difference between when we record income on a cash basis and when we record income on an accrual basis. And so we're gonna kind of use that to go to the statement of cash flows and show that change right here, which is gonna be a decrease. So if I start with net income here, I'm gonna decrease the accounts receivable because if I go to the balance sheet, you can see this accounts receivable wasn't increased. It was higher in 2024 than 2023. That means that we had income that we reported that we had not yet received the cash for. Therefore, if I start with net income that includes that income and subtract it out, then I can kind of back that out and get closer to where the net income should be on a cash basis. And we do that for all the differences on the balance sheet. So we can do that same kind of thought process for inventory, employment, prepaid, and so on. And that's where you get these changes, these differences are trying to back out the accrual components so that we're gonna be on a cash flow basis. And if done properly, that should give us the net cash provided by operating activities, which is in essence net income on a cash flow basis. So then we also have some cash flow stuff that isn't basically kind of like recorded on the income statement. So in the investing activities, the main items that we might have here would be say we purchased something and it wasn't an expense, like we purchased property, plant, and equipment. So this name investing can be a little bit deceiving because if you hear investing activities, you might just think stocks and bonds that you're investing in, CDs, cash. But investing from the corporate or a broader term of investing that we're using here is that we the company are investing stuff, capital cash into something so that we can use it into the future to generate revenue, meaning we're investing in assets. We're investing in long-term assets. Typically that's gonna be property, plant, and equipment. So stuff related to property, plant, and equipment, which when we buy it, even if paying cash, we don't expense it. We put it on the books as an asset. Therefore it's not part of like the operating activity up top, although you could have like some depreciation that could be up there. But in any case it's gonna be down here in the investing activities. When we buy and sell furniture and equipment, it's gonna be activities down here, which will have a cash flow impact. And then we have the financing activity. Also we could have other investing items that would be normal natural investing activities that you would think of stocks and bonds in investing too. Then we have the financing activities. Those are us financing our operations. So if we have assets on the books, we finance those assets that we have on the books either through loans, liabilities, or through equity. Us generating the money, investments from the owner or the equity that has been accrued or generated in the business. Those are the kind of things that would be down here. If we took out a loan, that would be cash flow that would be possibly increasing from the loan we took out. If we're paying off the loan, that would be a decrease in the cash flow. If we the owner put money in, then that would be a cash flow coming into the company from the owner. If we took the money out as a draw or a dividend in the form, if we're in the form of a corporation, then that would be cash flow going out from the finance activity down here. So then those are the three cash flow activities. And if everything is done properly, we should be able to add those three cash flow components up to get to the change in the cash flow, which should match as we saw the difference between cash and the prior period in this period. And then if we add that to the prior period cash, so now we got the prior period cash, the starting point, and then the change to the cash, we should get to the cash flow at the end of the period. And that would be the general idea of the statement of cash flows. So notice that QuickBooks can put together a pretty good statement of cash flows here that at least is starting out and reconciling, although there could be some still confusions when you get into more complex components, such as a lot of times it has to do with these depreciable assets and loans. So you can imagine situations where you took out a loan to purchase a vehicle, and that can be a little bit confusing for QuickBooks to properly allocate on the statement of cash flows when you dispose of assets that had some depreciation related to it. That could be a little bit confusing for QuickBooks to properly allocate as well. So you might need to do some adjustments for reporting purposes, but this gives you the general idea. And if you want to learn more about the statement of cash flows, we have got a course on it. It's really a good process to put together. If you could put together a statement of cash flows from a balance sheet, I mean, if you could reconstruct this, if you were to take this balance sheet right here, take this worksheet and try to reconstruct the statement of cash flows in Excel, be a huge exercise that would probably give you a lot in terms of knowing the double entry accounting system better. Now just one more thing to note here is if you go to the file tab up top or edit, and we go to the preferences, then we've got the report and graph preferences down below. And if I go into the company preferences, you've got the classification preferences here for the statement of cash flows. So if I go into that, then you can see how these changes, the differences in the balance sheet are being applied to operating, investing or financing activities. And if you need to make any adjustments to that, then you can go here to make those adjustments. And you can kind of think, like if you think about which category it should be in, notice it's checking off all the balance sheet accounts, and you try to say, okay, which category should these items be? And you can think of what are the normal transactions that record accounts receivable? Do they have an impact on the income statement? If they do, accounts receivable going up with an invoice, the other side being revenue, usually it's gonna be an operating activity. If they don't, like property, plants and equipment, when I buy property, plants and equipment, then I usually, even if I pay cash for it, I decrease cash balance sheet account, other side goes to property, plants and equipment, no impact on the income statement. Therefore, it's not gonna be operating. It's gonna be, in this case, investing activity. And then down here, if you think about, of course, accounts payable, you have a similar kind of thing. And that the other side of accounts payable is gonna be an income statement account of an expense oftentimes. Therefore, it's gonna be an operating activity on those. And then the loans, when we take out a loan, cash goes up. The other side is gonna be going to a loan, right? When we take a loan, it's no income statement impact until there's interest involved. Therefore, not typically operating, something else, in this case, investing activities.