Statement of cash flows

Statement of cash flows focuses on cash inflows and outflows into three types

Operating activities, Investing activities, financing activities

end of statement reconciliation of

cash balances

Must disclose major purchases that are financed

but not stated on the statement of cash flows

A business may show a positive net income calculated according to accrual accounting, but may have negative

cash flows from operations

Negative cash flow from operations can be reasonable for new/growing business, but may

signal that trouble is ahead

a business needs to generate enough cash

from its own operations to keep going.

the statement of cash flows gives users information not provided by

the income statement

Operating activities

related to the income statement (including interest income and expense)

Investing activities

purchase or sale of long-term assets and current “held to maturity” investments

Financing activities

Bank borrowing/repayments, stock issuance, stock repurchase, dividend payments

US GAAP dictates that interest expense is

an operating cash flow

Cash flow from operations can be presented using the

direct method or indirect method

over 90% of companies use the

indirect method

Cash flows from investing and financing activities are presented

the same way in either method

the statement of cash flows documents

corporate performance on a cash basis

cash is a vital resource for companies, so its important to understand

how cash is generated and used