A worksheet is like a working paper that assists in preparing a final document. Its use is very common among accountants for preparing financial statements like income statement, balance sheet, and statement of cash flows etc. In this article, we shall discuss a particular type of worksheet that accountants usually use in preparing a statement of cash flows.
The process of preparing a statement of cash flows involves the analysis of changes in non-cash balance sheet accounts. This process needs to be more formalized and documented when numerous adjustments and complications exist. A special worksheet serves this purpose.
A worksheet is neither a component of financial statements nor a part of the formal accounting record of the company. Its preparation is, therefore, not mandatory. It is an optional tool that facilitates to assemble and classify data for the statement of cash flows which is an essential component of financial statements. The use of worksheet assures full explanation of the changes in balance sheet accounts and their cash effects.
A worksheet for statement of cash flows consists of two sections – a balance sheet effects section and a cash effects section. Balance sheet effects section is used to analyze the changes in account balances and cash effects section is used to collect information to be disclosed in the statement of cash flows. Before further explanation of these two sections, view the skeleton format of the worksheet given below:
The balance sheet effects section is the first section of worksheet that explains the changes in all balance sheet account balances. To serve this purpose, this section makes the use of four columns (see example below). The opening balances are listed in the first column and the closing balances are listed in the fourth (last) column. The accounts having debit balance are listed separately from those having credit balance. The changes in all the balances are carefully computed and reconciled using accounting records and some additional information. These changes are then entered in the second and third (debit and credit) columns as appropriate. The amounts entered in debit and credit columns explain the reasons of the changes in account balances. They are therefore also known as reconciling items or reconciling amounts. If all changes are correctly reconciled and recorded, the totals of debit and credit columns will be equal.
(2). The cash effects section:
The cash effects of the changes analyzed in the balance sheet effects section are extracted and written in cash effects section. Cash effects are either inflows or outflows of cash. These inflows and outflows are classified as operating, investing, or financing cash flows. All inflows are listed in resources column and all outflows are listed in uses column of this section. After carefully entering all changes having cash effects, the two columns are totaled and compared. The difference between the total amounts of resources and uses columns represent net increase or decrease of cash during the period. This increase or decrease in cash must also be in agreement with the increase or decrease written in the cash line of the balance sheet effects section of the worksheet.
Meta company is consistently using indirect method for preparing its statement of cash flows. The comparative balance sheet and some additional information of the company are given below:
- Net income for the year: $500,000.
- Cash dividend declared and paid during the year: $280,000.
- Depreciation expenses for the year: $120,000
- Sold marketable securities for $70,000; the cost was $30,000.
- Acquired plant assets for $200,000. $60,000 paid in cash and a mortgage note payable was issued for the balance.
- Prepare a worksheet as a helping tool for the preparation of final statement of cash flows.
- Prepare a statement of cash flows of Meta company.
Notice that the cash effects section provides all information required to prepare a statement of cash flows by indirect method.