Cash Flow Statement

Cash flow is one of the more confusing accounting concepts for most people. Most of us understand cash-in and cash-out for our own wallet or pocket book, but cash accounting is more complicated for a business. This is caused by the concept of accrual basis accounting. One of the purposes of accrual basis accounting is to try to match expenses to revenues. For example, if a company purchases a machine that will be used for twenty years to produce items that are sold it is necessary to depreciate or “write-off” part of the cost of the equipment over twenty years. If the equipment is not depreciated over time, all the costs of buying the equipment will be shown against only the first year of sales. For the next 19 years the company will report only income and not show the costs related to producing it.

Depreciation expense is a non-cash expense. In other words the cash was all spent in the first year, but the expense is recorded over time. Other non-cash items could include sales that have been made for which cash has not yet been received. Accounts receivable are assets for which the cash has not yet been received. Expenses recorded in accounts payable but not yet paid for are non-cash expenses. There are several ways to calculate cash flow. One common way is to start with the income statement and then add or subtract items like depreciation, receivables, and payables to arrive at the net cash flow.


Although a person could take a cash flow course as a stand-alone accounting course, it will be much easier to understand the concepts after taking principles of accounting. The basic building blocks needed to understand cash flow are provided in principles of accounting. Some courses that are offered on cash flow focus not only on understanding how to analyze or calculate a cash flow statement from company financials but also on how cash flow affects operations, investing, and financing. This type of class is intended for financial professionals who might be making decisions concerning offering credit, investing in a business, or evaluating companies for mergers and acquisitions.

Other cash flow courses focus on managing cash flow. These teach students how to accelerate cash inflows, delay cash outflows, invest surplus cash to earn a rate of return, borrow cash wisely, and keep the right amount of cash on hand. These courses teach students to analyze and understand things like how long it takes to collect cash from customers, how much cash on hand should be available, and how to identify cash flow problems. Basic cash flow statements and principles of cash management are taught in college and university degree programs during the principles of accounting classes. Intermediate accounting covers cash flow concepts in more detail for those seeking accounting degrees.

Many different types of people should take an accounting course on cash flow. Business owners must understand not only how cash flow works but also how to manage it effectively in their business. This is important also for lending officers who evaluate requests for loans. Managers in companies that extend credit to customers also need to understand how to evaluate the customer’s ability to pay for purchases. Executives and managers in larger businesses need to understand how the decisions they make affect cash flow. Operating decisions can have a positive or negative effect on cash flow, and executives and managers are accountable not only to their bosses but also to stockholders for wise decisions. Certified public accountants and consultants also need to understand cash flow in order to assist their clients and to maintain proficiency in their field. Many stand-alone cash flow courses provide continuing professional education credits for those in the field.