Failed cash flow check
There are two valid reasons why the cash flow check doesn’t match
Overview
Certain transactions may not appear in your cash flow statement, causing mismatches in specific periods. Two frequent causes are accumulated depreciation and retained earnings. Standard cash flow statements often exclude these items by design, which can lead to discrepancies.
If your cash flow check is off for every period, it generally points to a broader modeling issue rather than a localized problem with retained earnings or accumulated depreciation.
Basics
The cash flow statement tracks changes from most balance sheet items but does not automatically recognize accumulated depreciation and retained earnings. It also excludes direct movements in the bank account, because calculating those inflows and outflows is the main purpose of a cash flow statement.
If a transaction affects any of these excluded items – alongside a typical balance sheet account – only part of the entry is captured, creating a discrepancy in your estimated cash flow.
Resolution steps
If this issue appears only in certain periods but the rest of your setup looks correct, consider these steps:
Check retained earnings and accumulated depreciation
Examine these accounts for unusual or unexpected transactions. Confirm whether any such entries genuinely belong outside the cash flow statement.
Identify the corresponding entries
Locate the double entry (or offsetting transactions) associated with retained earnings or accumulated depreciation. Make sure that the relevant portion of each transaction appears in the cash flow statement where needed.
Manually adjust
Add a manual adjustment line to your cash flow statement to account for the missing piece of the transaction. Document why this entry is necessary to help anyone reviewing the model later.
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