Solving cash flow statement problems is not always easy.
Have you ever been completely confused as you try to put together a cash flow statement? I know I have.
So how can we simplify this process?
Think cigar boxes. Yes, that’s right, cigar boxes.
A Cigar Box for Each Cash Flow Category
Imagine that your organization has three cigar boxes:
1. One for operations
2. One for investing
3. One for financing
Now pretend that every time the organization receives cash it is placed in the applicable box. If for example, the entity receives $10,000 from the sale of stock, the money is placed in the investing cigar box. And if $4,000 of that money is used to buy bonds, then that much money comes out of the investing cigar box. On the cash flow statement, this will look like:
Proceeds from sale of securities $10,000
Purchase of securities (4,000)
This is simple.
The confusion seems to come, at least for me, when I am reconciling cash flow from operations using the indirect method. You start with net income and add back or subtract items such as depreciation and changes in short-term assets and liabilities; your goal is to arrive at the actual net cash going in and out of the operating cigar box.
Isolate the Single Transaction
Another trick in simplifying the creation of the cash flow statement: Consider each transaction as though it is the only one for the year.
For example, if the entity sells stock and realizes a gain of $2,000 but receives actual cash of $10,000. Isolate this transaction as though it is the lone one for the year.
So we would have net income of $2,000. But how much cash went into the operating cigar box? None. Therefore I will, in the operating section of the cash flow statement, subtract $2,000 from net income to arrive at net operating cash flows of $0 and I will show cash flow of $10,000 going into my investing cigar box.
Isolating single transactions will provide simplicity and clarity.
Keep thinking cigar boxes; then isolate each cash flow transaction. You will find yourself solving the cash flow statement puzzle with ease.
You might even deserve a cigar.