In this article, we prepare a cash flow statement for a sole trader’s business. Compared to a limited company, preparing a cash flow statement for a sole trader is significantly easier.

Example

John Bros. started a business on 1 January 2017 with cash of $250,000. They purchased furniture for cash amounting to $35,000. They submitted the following information on 31 December 2017:

  • Purchased merchandise for $85,000 of which $75,000 was paid during the year
  • Salaries amounting to $72,000 of which $6,000 was unpaid at the end of the year
  • Total sales of $245,000, including $35,000 receivables at year-end
  • Rent paid for shop amounting to $60,000
  • Commission received totaling $9,000

Required: Prepare a cash flow statement for John Bros. for 2017.

Solution

Example Statement of Cash Flows For a Sole Trader

Explanatory note on the use of brackets: In accounting, it is customary to show a figure in brackets if it is a negative figure (i.e., preceded by a minus sign).

This figure will be deducted from the other figures to arrive at the total of the column. Brackets used in this way appear frequently in cash flow statements.

For Cashflow statements to be useful, you must be able to understand each section of it. This article will teach you how to understand and analyze cash flow statements: How to Read and Interpret a Cash Flow Statement

Frequently Asked Questions

What is a statement of cash flow?

A statement of cash flows is an integral part of the financial reports made by business entities. This statement presents information on how cash was generated and used during a particular period.

Why is the statement of cash flow important?

The statement provides valuable insights into the company's ability to generate cash, its operating cycle, and its use of resources in the past. This information is vital to a company's investors and creditors as it provides them with an insight into the business's ability to generate cash in future periods. It also helps them determine the reason behind changes in cash brought about by operating, investing, and financing activities of a company.

Why is the statement of cash flow prepared?

A statement of cash flows is prepared to provide information on the cash inflows and outflows of a business.

How do we prepare a statement of cash flow?

To prepare a statement of cash flows, we will gather information on all activities that affected changes in cash. This includes the following: a) Cash Generated & Used (Cash Flow from Operations): It is defined as net income adjusted for non-cash items such as Depreciation. It shows how much cash was generated by the business's operating activities. b) Cash Flows from Investing Activities: It represents the cash that comes into the business as a result of investing activities such as purchase or sale of marketable securities, purchases or sales of property and equipment, investment in other businesses, etc. c) Cash Flows from Financing Activities: It is defined as Cash Flows resulting from a company's financing activities. These include proceeds from borrowing, repayments of debt, and interest paid on debt.

How often is the statement of cash flow prepared?

The statement must be presented for each of three different time periods, which are defined as follows: a) For the current period, also known as the period-ending balance b) For the comparative period, which is defined to be the last year-end for which information is available. This becomes the base year in subsequent years c) The forecast period, which begins immediately after the most recent reporting date and ends one year after that date.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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