Building Your Business Operations & Success Accounting Comparative Balance Sheets for a Business Preparation for the Statement of Cash Flows By Rosemary Carlson Updated on December 8, 2018 In This Article View All In This Article Analysis of Comparative Balance Sheets Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities Net Cash Flows for the Firm XYZ Company Comparative Balance Sheets Photo: NicoElNino/Getty Images In order to analyze the financial statements for a business, information is needed from the balance sheets. The owner must look at the last two years of the firm's balance sheets and compare the differences between the two in order to develop the Statement of Cash Flows. The table below gives you sample Comparative Balance Sheets for a firm. With sample information from an income statement and the information from these comparative balance sheets, you can develop your Statement of Cash Flows. The business owner must also have information from the income statement: net income (or loss) and depreciation as both are considered cash flows to the firm. Analysis of Comparative Balance Sheets In order to analyze your comparative balance sheets and develop your Statement of Cash Flows, you first consider any increases or decreases in your current asset and current liability accounts between the two years of balance sheet information. Here's the rule you should always remember when developing your Statement of Cash Flows: Increases in current asset accounts, decrease cash Decreases in current asset accounts, increase cash Increases in current liability accounts, increase cash Decreases in current liability accounts, decrease cash Cash Flows from Operating Activities Looking at the balance sheets, accounts receivable has increased from $170,000 to $200,000 for an increase of $30,000. Since that increase occurred on the asset side of the balance sheet, it is shown as a negative figure. Why? If the firm extended $30,000 more in credit to its customers, then it had $30,000 less to use. Likewise, inventory increased by $20,000. Prepaid expenses decreased by $10,000. A decrease in an asset account, a source of funds to the firm, is a positive number. Cash is not included in our initial analysis. It will soon become clear why. Now, look at the liabilities section of the balance sheet. Accounts payable increased by $35,000. Short-term bank loans didn't change. Accrued expenses such as taxes and wages decreased by $5,000. Since this is a decrease in a liability account, it is a use of funds for the firm and a negative number. Next is Net Cash Flows from Operating Activities, the summary of the first section of the Statement of Cash Flows. When you add up the adjustments to net income and depreciation, you get $150,500. The firm is generating a positive net cash flow from its operating activities. Cash Flows from Investing Activities The next section of the cash flow statement is Cash Flows from Investing Activities. Usually, this section includes any long-term investments the firm makes plus any investment in fixed assets, such as plant and equipment. The firm invested $30,000 more in long-term investments in 2009. That shows up as a negative number as it was a use of assets. The firm also spent $100,000 for more plant and equipment. Next is Net Cash Flows from Investing Activities, the summary of the second section of the Statement of Cash Flows. It is a negative $130,000 since this was the outlay in 2009. Cash Flows from Financing Activities The last section of the cash flow statement is Cash Flows from Financing Activities. In this case, the firm was financed with long-term bank loans that have increased by $50,000. Dividends to investors in the amount of $65,000 have also been paid, which is a cash outflow and a negative number. Net Cash Flows from Financing Activities is a negative $15,000. Net Cash Flows for the Firm Now, we combine the three sections of the cash flow statement to see where the firm is from a cash flow perspective. When you sum the net cash flows from each section you get a positive $5,500. This is the net increase in cash flows over the year for the business firm. Looking back at the cash account on the comparative balance sheets, the analysis is correct. Cash has increased by $5,500 from year to year. Now go to the Statement of Cash Flows and finish developing your cash flow statement! XYZ Company Comparative Balance Sheets Assets Year-End 2016 Year-End 2017 Cash $ 30,000 $ 35,500 Marketable Sec 10,000 10,000 Accts Rec 170,000 200,000 Inventory 160,000 180,000 Prepaid Exp 30,000 20,000 Investments 20,000 50,000 Plant & Equipment 1,000,000 1,100,000 Less Acc Depreciation 550,000 600,000 Net Plant & Equipment 450,000 500,000 Total Assets 870,000 995,500 Liabilities and Owner's Capital Accts Pay 45,000 80,000 ST Bank Loans 100,000 100,000 Accrued Exp 35,000 30,000 LT Bank Loans 40,000 90,000 Owners Capital 650,000 695,500 Total Liabilities and Capital 870,000 995,500 Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Related Articles How To Interpret Financial Statements How to Prepare a Statement of Cash Flows Using the Indirect Method What Is Financial Performance? How to Do a Cash Flow Analysis What Is Financial Ratio Analysis? 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