## Cash Flow Statement – Mystery or just mathematics?

###### Posted on 30 September 2016

By now, charities reporting under Tiers 1–3 have probably realised that a key component of the Performance Report (Tier 3)/Financial Statements (Tiers 1 & 2) is a Statement of Cash Flows. Like the Statement of Financial Performance and Statement of Financial Position in Tier 3, the Statement of Cash Flows has a certain format for presentation which includes grouping transactions according to minimum categories. This is relatively straightforward to understand and is detailed in the Tier 3 Standard(external link) and also laid out in the optional Excel template. Tiers 1 and 2 have a specific standard (PBE IPSAS 2)(external link) to follow when preparing their Statement of Cash Flows. However, charities are telling us they are finding the Statement of Cash Flows challenging to calculate and they want to know what is the purpose of the Statement of Cash Flows; and how on earth do we do it?

#### What’s the purpose of the Statement of Cash Flows?

The purpose of the Statement of Cash Flows is to show how much actual cash went through the charity during the reporting period by taking out any non-cash accounting entries. This is because accounting entries can disguise the amount of cash used in a charity due to accrual accounting items such as depreciation or other year-end adjustments. It would not be uncommon for a charity to make an accounting surplus, yet have less cash in the bank at the end of the year than at the beginning.

##### Example 1

Accounting surplus/deficit could include revenue or expenses which are still outstanding as accounts receivable (debtors) or accounts payable (creditors) for which actual cash has not been received or paid.

##### Example 2

Many charities have property, plant and equipment (fixed assets) which are depreciated throughout the year. Depreciation is an accounting entry and no cash actually changes hands. Therefore this is excluded from the Statement of Cash Flows.

The table below illustrates what is included in the Statement of Financial Performance and Statement of Financial Position as opposed to the Statement of Cash Flows:

By excluding these non-cash accounting entries from the Statement of Cash Flows, a charity will clearly show whether more cash was received or spent for the year.

#### How do we do it?

The Statement of Cash Flows can seem mysterious, but in reality, it’s just a case of simple mathematics. The basic calculation to work out cash flow is:

Amounts recorded in the Statement of Financial Performance

PLUS

Movements in the Statement of Financial Position

MINUS

Non-cash movements (e.g. depreciation)

EQUALS

Cash Flows

If we work this formula through using one item in the Statement of Cash Flows, we can see how this works. Let’s look at the “Income” line in the table above. At the beginning of the financial year, there is income receivable (debtors) of \$100. This amount was received during the year. During the year, you raise invoices for \$1,000 of income, but at the end of the year, \$450 of those have not been paid. The amount of income recorded in the Statement of Financial Performance for the year would be \$1,000 but the amount of cash actually received would be the \$100 that was outstanding at the beginning of the year, plus the \$1,000 of invoices raised, less the \$450 of those that were unpaid at year end. \$1,000 + \$100 - \$450 = \$650. This is the cash flow during the year for income. You can see that the actual cash received during the year in the Statement of Cash Flows is less than the amount of income in the Statement of Financial Performance. This is how you sometimes end up with the result of making an surplus, yet having less cash at the end of the year than at the beginning.

So to work out your entire Statement of Cash Flows, you need to carry out the same exercise for the whole of your Statement of Financial Performance and Statement of Financial Position. To help you do this, we have developed a worked example of a Statement of Cash Flows in Excel which you may find useful [XLSX, 34 KB].

The first tab of the spreadsheet gives you some instructions on how to complete the worksheet. Although the basic concept remains the same, you could alter this spreadsheet to make it work better for your organisation. This spreadsheet gives you a template to start with and shows you the mathematics behind the Statement of Cash Flows. The Statement of Cash Flows will be slightly different for each charity depending on how you choose to present it, for example if you stick strictly to the minimum categories named in the Tier 3 standard, or whether you choose to disaggregate or rename these. We would recommend reviewing the requirements of the standard before you attempt to use this spreadsheet so that you have an understanding of the required presentation.

We understand that this can be quite tricky if you’ve never prepared a Statement of Cash Flows before. Give it a go, and if you get stuck feel free to send us an e-mail to info@charities.govt.nz and we will be able to help you.