QuickBooks 2012 Statement of Cash Flows

Don’t spend too much time spinning your wheels trying to understand the QuickBooks 2012 Statement of Cash Flows. QuickBooks does supply a statement of cash flows, but you don’t need to use this statement. In fact, QuickBooks produces cash basis income statements, which give you almost the same information — and in a more easy-to-understand format.

Look at the following balance sheet for an imaginary hot dog stand at the beginning of the day.

A Simple Balance Sheet

Assets
Cash	$1,000
Inventory	3,000
Total assets	$4,000
Liabilities
Accounts payable	$2,000
Loan payable	1,000
Owner’s equity
S. Nelson, capital	1,000
Total liabilities and owner’s equity	$4,000

Now take a look this table, which shows the balance sheet at the end of the day, after operations for the hot dog stand have ended.

Another Simple Balance Sheet

Assets
Cash	$5,000
Inventory	0
Total assets	$5,000
Liabilities
Accounts payable	$0
Loan payable	0
Owner’s equity
S. Nelson, capital	5,000
Total liabilities and owner’s equity	$5,000

Notice that at the start of the day, cash equals $1,000, and at the end of the day, cash equals $5,000. The statement of cash flows explains why cash changes from the one number to the other number over a period of time. In other words, a statement of cash flows explains how cash goes from $1,000 at the start of the day to $5,000 at the end of the day.

The following table, not coincidentally, shows a statement of cash flows that explains how cash flowed for your imaginary hot dog stand business.

A Simple Statement of Cash Flows

Operating activities
Net income	$4,000
Decrease in accounts payable	(2,000)
Adjustment: decrease in inventory	3,000
Net cash provided by operating activities	$5,000
Financing activities
Decrease in notes payable	(1,000)
Net cash provided (used) by financing activities	(1,000)
Increase in cash	4,000
Cash balance at start of period	1,000
Cash balance at end of period	$5,000

By convention, accountants show negative numbers inside parentheses. These parentheses more clearly flag negative values than a simple minus sign would.

The last three lines of the statement of cash flows are all easily understandable. The cash balance at the end of the period, $5,000, shows what cash the business holds at the end of the day. The cash balance at the start of the period, $1,000, shows the cash that the business holds at the beginning of the day.

Both the cash balance at the start of the period and the cash balance at the end of the period tie to the cash balance values reported on the two balance sheets. Clearly, if you start the period with $1,000 and end the period with $5,000, cash has increased by $4,000. That’s an arithmetic certainty. No question there, right?

The financing activities of the statement of cash flows show how firm borrowing and firm debt repayment affect the firm cash flow. If the hot dog stand business uses its profits to repay the $1,000 loan payable — and, in this case, this is what happened — this $1,000 cash outflow shows up in the financing activities portion of the statement of cash flows as a negative $1,000.

The top portion of the statement of cash flows is often the trickiest to understand.

The operating activities portion of the statement of cash flows essentially shows the cash that comes from the profit. You see that the first line in the operating activities portion of the statement of cash flows is net income of $4,000. This is the net income amount reported on the income statement for the period.

However, the net income or operating profit reported on the business’s income statement isn’t necessarily the same thing as cash income or cash profit. A variety of factors must be adjusted in order to convert this net income amount to what’s essentially a cash operating profit amount.

For example, in the case of the hot dog stand business, if you use some of the profits to pay off all the accounts payable, this payoff uses up some of your cash profit. You can see that the decrease in the accounts payable from $2,000 to $0 over the day required, quite logically, $2,000 of the net income.

Another way to think about this is that essentially, you used up $2,000 of your cash profits to pay off accounts payable. Remember that the accounts payable is the amount that you owed your vendors for hot dogs and buns.

Another adjustment is required for the decrease in inventory. The decrease in inventory from the start of the period to the end of the period produces cash. Basically, you’re liquidating inventory. Another way to think about this is that although this inventory shows up as an expense for the day’s income statement, it isn’t purchased during the day. It doesn’t consume cash during the day; it was purchased at some point in the past.

When you combine the net income, the accounts payable adjustment, and the inventory adjustment, you get the net cash provided by the operating activities. These three amounts combine to $5,000 of cash provided by the operations.

After you understand the details of the financing and operating activities areas of the statement of cash flows, the statement makes sense. Net cash provided by the operating activities equals $5,000. Financing activities reduce cash by $1,000. This means that cash actually increased over the period by $4,000, which explains why cash starts the period at $1,000 and ends the period at $5,000.

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