You might think of a cash surplus as having some money left over after subtracting purchases and bill payments from income. In financial terms, a cash surplus or cash flow surplus is very similar. Companies report changes in the amount of cash available to pay bills on a statement of cash flows at the end of each year or accounting period. A cash surplus or deficit refers only to changes in the amount of cash available. The actual amount of available cash is reported on the firm’s balance sheet.
Gather the necessary information to compute the company’s cash flow surplus. Cash flow statements are derived from the firm’s income statement and balance sheet, so all the data you need will be found in these financial statements and related documents.
Start with the company’s net income, which you will find on the income statement. Adjust net income for changes in cash available not reflected in net income. For example, add depreciation allowances to net income, since depreciation doesn’t actually reduce the amount of cash on hand. Adjust the net income for changes in items such as accounts payable, accounts receivable, and inventory. The result is the change in cash available due to operating activities.
Calculate the change in cash available resulting from investment activities. The sale of assets such as equipment, real estate or securities is a positive number because it means the company has more cash on hand. Subtract money spent for the purchase of assets to find the net change in cash available due to investments.
Compute changes in cash available resulting from financing activities. Proceeds from issuing stock, or from long-term borrowing activities like the sale of bonds, are positive because they add to cash available. Subtract dividends paid and the cost of repurchasing stock or paying off long-term debts
Add up the net changes in cash available from operating, investment and financing activities. If the result is a positive number, it is the cash surplus for the accounting period. If you get a negative amount, you have a cash flow deficit rather than a surplus.