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The statement of cash flow shows the net total cash flow correctly, but it does not show the correct cash flow from operating and/or investing. It appears that the net operating cash flow is calculated by taking net income for the period and then adjusting that by the delta of balance sheet account balances to arrive at net cash flow. That is a good first step, however, more is needed to be done in order for the cash flow to be accurate.

Here are some of the scenarios where this would be an issue.

  1. Assume in Year 1, the only transaction is that the business received an invoice for $100k for an equipment that they purchased and did not pay it until Year 2 and the business has zero net income. In Year 1, the only entry would be Dr. Fixed Asset $100k Cr. Accounts Payable $100k. With this scenario, would the cash flow reports here show that the Net Cash Flow from Operating as a positive $100k (zero net income plus the increase in Accounts Payable)? If yes, did this business generated $100k in operating cash flow simply by entering an invoice for equipment purchase into AP? Surely not. 
  2. It appears that “Cash Flow from Investing Activity” is simply the delta between Long Term Asset account balances. The Cash Flow report picks up the change in Accumulated Depreciation (a Long Term Asset Account) as a positive net cash flow from investing activities. Often times, the change in Accumulated Depreciation is depreciation expense. Did the business really generated positive cash flow from investing activities simply because they had depreciation expense or should the depreciation expense be an adjustment to Net Income to arrive at Net Cash Flow from Operating Activities?
  3. How does the cash flow report adjust for other non-operating income such as gains from sale of equipment, dividends or investment income, other comprehensive income, PPP loan forgiveness etc from cash flow from operating activities?

​Hey @Tristan Nguyen thanks for reaching out with the detailed post!
 

I checked in with our team; we do multiple validations and confirmations of our calculations and what QuickBooks Online calculates to ensure everything lines up and is valid. We believe that in all of the scenarios you described, we would handle them correctly and accurately. If you have a specific client or set of books that appears inaccurate, could you please let me know the client and where you see the discrepancy? You can message me on this forum or email support(at)digits(dot)com if you want to keep that information private. 

Best,

Michael

Hi @Michael,

Thank you for getting back to me. QuickBooks cash flow report is also inaccurate so if Digits is validating the reports against QuickBooks, then it is likely also wrong.

Here is an example of issue #3 that I see in Digits cash flow report:

This particular client received $303k in Other Income. These other incomes are one-off grants that are not part of their normal operation. If you back away this income from the Net Income of $96k, then their net operating is a net loss of $207k

 

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In the cash flow report, there is no adjustment made for other non-operating income to reconcile Net Income to Net Cash by operating activities. In this example, the net cash from operation is overstated by $303k (the amount of other income). 

 

There are many “exceptions” to the indirect cash flow reporting logic of just simply taking net income and adjusting it by the delta of the balance sheet account balances that QuickBooks use and sounds like Digit is also using the same logic. 

I am importing some of my other clients so that I can give you more examples. They are pending right now.

Thank you for this level of detail @Tristan Nguyen, it is greatly appreciated. I’m digging into this more with the team and I’ll keep an eye on the other clients you’ve recently added as well. 

Hi @Michael,

Here is an example for issue with #1 in my post from other client.

 There is a positive $13,600 adjustment for Accounts Payables to Net Income By Operating Activities. 

Here in AP, you can see that this positive decrease is due to the IES invoices and Secretary of State that were vouchered into AP which are offsets by the payments made to Northern and Bridgestone.

In Buildings, you can see the decrease related to the same invoices.

 

In the example above, I hope you can see how by simply by entering a fixed asset purchase into AP causes the Net Cash Provided by Operating Activities to be overstated in Digits cash flow report.

Thank you again @Tristan Nguyen, the more information the better! I will keep you updated as the team digs into all of this. 

Thank you for the comprehensive examples, @Tristan Nguyen . My name is Yass, and I lead the product team here at Digits. All of your comments completely make sense, and as an accountant in my former career, I can vouch for how complicated (and manual) the preparation of a cash flow statement can be. You are correct that our current allocation of cash-impacting items between operating, financing, and investing activities can be improved and we are focusing on this. I’d love to get your thoughts on which area you would consider the highest priority. Would you like the logic behind cash flow to address the specific issues you flagged, or are you looking for more flexibility to customize cash flow according to each of your client’s needs? Appreciate all your insight!

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