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Financial Statements

The statement of cash flows considers the inputs and outputs in concrete cash within a stated period. The general template of a cash flow statement is as follows: Cash Inflow – Cash Outflow + Opening Balance = Closing Balance

Example 1: in the beginning of September, Ellen started out with $5 in her bank account. During that same month, Ellen borrowed $20 from Tom. At the end of the month, Ellen bought a pair of shoes for $7. Ellen’s cash flow statement for the month of September looks like this:

  • Cash inflow: $20
  • Cash outflow:$7
  • Opening balance: $5
  • Closing balance: $20 – $7 + $5 = $18

Example 2: in the beginning of June, WikiTables, a company that buys and resells tables, sold 2 tables. They’d originally bought the tables for $25 each, and sold them at a price of $50 per table. The first table was paid out in cash however the second one was bought in credit terms. WikiTables’ cash flow statement for the month of June looks like this:

  • Cash inflow: $50 – How much WikiTables received in cash for the first table. They didn’t receive cash for the second table (sold in credit terms).
  • Cash outflow: $50 – How much they’d originally bought the 2 tables for.
  • Opening balance: $0
  • Closing balance: $50 – 2*$25 + $0 = $50–50=$0 Indeed, the cash flow for the month of June for WikiTables amounts to $0 and not $50.

Important: the cash flow statement only considers the exchange of actual cash, and ignores what the person in question owes or is owed.

Statement of profit and loss (income statement or statement of operations)

The statement of profit or income statement reports the changes in value of a company’s accounts over a set period (most commonly one fiscal year), and may compare the changes to changes in the same accounts over the previous period. All changes are summarized on the “bottom line” as net income, often reported as “net loss” when income is less than zero.

The net profit or loss is determined by:

Sales (revenue)

– cost of goods sold

– selling, general, administrative expenses (SGA)

– depreciationamortization

= earnings before interest and taxes (EBIT)

– interest and tax expenses

= profit/loss