A cash flow statement is a report, not a reconciliation. If the closing bank balance doesn’t match the cash flow statement, something has gone wrong with the cash flow statement.
To figure out where you may have gone wrong, it is all about working backwards.
First, start with the easiest sections and work your way to the hardest. The easiest section to start with is the Investing and Financing activities.
Investing and Financing Activities
For Investing, think about any cash spent or received for non-current assets. These will include any cash payments for non-current assets and proceeds received from the disposal of non-current assets.
For Financing, focus on any cash movements in equity items and the current account.
Remember receipts increase and payments decrease.
Operating Activities
The hardest part is the operating activities. You need to make sure the reconciliation always aligns with the operating activities. You must account for any movements in working capital in both the operating activities and the reconciliation.
The easiest way to think about this is: Assets = Liabilities + Equity.
Non-current assets and equity/current account are already accounted for in the investing and financing activities.
In the Operating Activities section, you need to account for all movements in Current Assets, Current Liabilities and the Profit/loss (income and expenses).
Start with income and expenses and then work towards the current assets and liabilities.
- For the operating activities, you start with total Revenue and total expenses.
- Then add bank non-cash items and adjust movements in AR, Inventory, Prepayments, Accrual PAYE and Income in advance.
- Non-cash items should match the top and bottom.
You may find that accounting for movements in some working capital items:
For Cash Receipts from customers:
Increases in assets reduce cash sales receipts (money is due to be received) AND increases in liabilities to increase cash sales (as revenue has been prepaid)
For Cash Payments to suppliers:
Increases in assets increase cash purchases (expenses have been prepaid) AND increases in liabilities decrease cash purchases (Money is due to be paid).
There are also movements in other assets and liabilities
Here are the rules to adjust for any other working capital items:
- Any increases in working capital assets are negative values as it yet to be received, RWT/GST Receivable/etc.
- Any increases in working capital Liabilities are positive values as the money is yet to be paid, like GST Payable.
So under the reconciliation
Start with Profit after tax, add back non-cash items (this should be the same as the Operating Activity, except it has taxation expense. Then adjust for movements in working capital (this should be the same as you did in operating activities.