Accountants sometimes are challenged when it comes to preparing a statement of cash flows. This is especially true when there are numerous adjustments to consider such as depreciation expense, unrealized gains or losses on investments, or in-kind gifts and expenses. All these challenges are easily overcome by using a cash flow tool such as the one illustrated for Small Charity, Inc. (Download the tool and accompanying sample financial statements.)
The spreadsheet matrix tool effectively operates as a double-entry accounting system, where only a single entry needs to be entered for an adjusting item. That is because each individual entry adjusts a statement of financial position column and a statement of activity/cash flow line. Properly using this approach will help you make sure your statement of cash flows remains balanced throughout the preparation process.
Initially, comparative statement of financial position data is entered across the top of the spreadsheet with debit balances being entered as positive numbers and credit balances being entered as negative amounts. Assuming your statement of financial position balances, then the sum of the changes in the total assets, liabilities, and net assets will be zero.
Next, you enter the statement of activity data in the net asset column with revenues and income being positive and expenses and losses being negative. The change in net assets should equal the difference between beginning and ending net assets.
Finally, you look at each column to determine how the changes in statement of financial position items affect cash flows. For example, the change in contributions receivable would affect cash flows from contributions. Changes in other receivables would affect cash flows from program revenues. Changes in investments would affect investment realized and unrealized gains or losses. Changes in fixed assets would affect purchases and disposals of property as well as depreciation expense. Changes in payables, accrued expenses, and other liabilities would affect the amounts paid to vendors. Changes in debt would affect the amount of proceeds from the issuance of debt and well as principal payments made during the year.
One of the keys to using this tool to produce accurate statements of cash flows is to capture and list in the net asset column non-cash activities. These would include, but are not limited to:
Realized and unrealized gains and losses on investments
Amortization or accretion of discounts and premiums related to investments or contributions receivable
Bad debt expenses
Forgiveness of indebtedness
Depreciation
In-kind contributions and expenses
Donated securities
You will also need to increase cash inflows from investment income and increase cash outflows for payments to employees and vendors for investment management fees that are now being reported as an offset to investment income.If you have in-kind gifts and expenses, you can enter the in-kind revenue as a negative amount in the contributions line and cash column and enter the in-kind expense as a positive amount in the payments to vendors line and cash column. If you have received an in-kind contribution of property, you would enter a negative amount on the contributions received line in the property column. Likewise, if you had a forgiveness of a loan, you would enter a negative amount in the contributions received line and debt column.
While there are numerous adjustments to consider when converting a statement of activities to a statement of cash flows, the cash flow matrix tool will help you capture all the significant adjustments simply and effectively.
Additional Resources:
Small Charity, Inc. and the accompanying cash flow tool are intended for use with smaller, simpler NFPs. For a more complex example and cash flow tool, download the Save Our Charities Illustrative Financial Statements. All are available here.