What is a Statement of Cash Flows?

The Statement of Cash Flows outlines how cash is generated and used within a charity over a specific period. Unlike the income statement, which focuses on revenues and expenses, the cash flow statement highlights actual cash movements. It is divided into three main sections:

  1. Operating Activities: This section details cash flows from the charity’s primary revenue-generating activities. It includes cash received from donations, grants, program fees, and money paid for operational expenses like salaries and utilities.
  2. Investing Activities: This section shows cash transactions in acquiring and disposing of long-term assets like property, equipment, and investments. It helps stakeholders see how the charity allocates resources to foster future growth.
  3. Financing Activities: This portion covers cash flows related to borrowing and repaying loans or receiving contributions from members and donors. It reveals how the charity finances its operations and capital projects.

The Statement of Cash Flows is more than just a document; it acts as a cornerstone of financial management for charities. It details how the charity generates and uses cash over a specific period, offering a clear view of its economic health and prospects.

This statement fulfills several essential purposes for charities.

  • Cash Management: This section offers a clear overview of cash inflows and outflows, allowing charities to manage their liquidity effectively. This capability is essential for fulfilling obligations, particularly during periods of variable donations.
  • Financial Analysis: Board members, donors, and regulators use this statement to evaluate the charity's financial health. Positive cash flow demonstrates effective financial management, whereas negative cash flow may indicate potential problems.
  • Budgeting and Planning: Analyzing cash flows allows charities to make informed decisions regarding future budgets and financial strategies, ensuring effective allocation of resources.

Best Practices for Preparing the Statement of Cash Flows

To create an accurate and informative Statement of Cash Flows, charities should follow these best practices:

  • Use the Indirect Method: Most charities report cash flows from operating activities using the indirect method, beginning with net income and adjusting for changes in working capital accounts.
  • Regular Updates: Regularly updating cash flow statements enhances accuracy and offers real-time insights into the charity's financial health.

Seek Professional Assistance: Collaborating with accountants specializing in charity financial reporting helps ensure adherence to Canadian accounting standards and best practices.

For charities in Canada, the Statement of Cash Flows is more than just a financial report; it is a vital tool for transparency, management, and strategic planning.

By understanding and effectively utilizing this statement, charities can take control of their financial health and make confident, informed decisions to serve their communities better.

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