Cash Flow Statement

Definition

The Cash Flow Statement explains how cash and cash equivalents moved during the period, classified into operating, investing, and financing activities. Unlike the income statement, it is prepared on a strict cash basis and reconciles opening and closing cash on the balance sheet.

Key rules

ASPE Section 1540 requires the cash flow statement as part of a complete set of financial statements. Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash with insignificant risk of change in value (typically original maturity of three months or less).

Two methods are permitted for presenting operating activities:

Interest and dividends paid or received may be classified as operating or financing, applied consistently across periods (ASPE 1540.31).

Example

Indirect-method operating section for the consulting CCPC:

Operating activities
  Net income                                  79,050
  Add: amortization                              950
  Changes in working capital:
    Increase in accounts receivable           (2,100)
    Increase in prepaid expenses                (200)
    Increase in accounts payable                 800
    Increase in GST payable                      150
    Increase in income tax payable             6,300
  Cash from operating activities              84,950

Investing activities
  Purchase of computer equipment              (2,400)
  Cash used in investing activities           (2,400)

Financing activities
  Dividends paid                             (40,000)
  Shareholder loan repayment                  (1,500)
  Cash used in financing activities          (41,500)

Net increase in cash                          41,050
Cash, beginning of year                        4,150
Cash, end of year                             45,200

Common mistakes

• Treating a non-cash transaction (for example a shareholder loan converted to share capital) as a cash flow. Disclose it in the notes instead.
• Forgetting to add back amortization, deferred tax, and gains or losses on asset disposal when using the indirect method.
• Netting purchases and proceeds on equipment. Investing activities are presented gross.
• Classifying interest paid as investing. ASPE defaults to operating unless a financing policy is adopted consistently.
• Failing to include GST refunds or payments in the working capital changes, which causes the statement not to reconcile.

Related concepts

The cash flow statement ties the income statement to the balance sheet by explaining the change in cash. Non-cash transactions and the cash-and-equivalents policy are disclosed in the notes.