Unit 3 Working With Financial Statements G1

GROUP 1 — Sources, Uses & Standardized Financial Statements

Source of Cash

An activity that brings cash into the business.

Use of Cash

An activity that causes cash to leave the business.

Sources of Cash Rule

A decrease in an asset OR an increase in a liability/equity account is generally a source of cash.

Uses of Cash Rule

An increase in an asset OR a decrease in a liability/equity account is generally a use of cash.

Decrease in Accounts Receivable

Source of cash because customers are paying the company what they owe.

Increase in Accounts Receivable

Use of cash because more sales have not yet been collected in cash.

Increase in Accounts Payable

Source of cash because the company delays paying suppliers, allowing it to keep cash longer.

Decrease in Accounts Payable

Use of cash because the company is paying off amounts it owes.

Increase in Inventory

Use of cash because the company spends cash to acquire more inventory.

Increase in Long-Term Debt

Source of cash because borrowing money brings cash into the company.

Paying a Cash Dividend

Use of cash because cash is paid to shareholders.

Paying Off a Bank Loan

Use of cash because cash is used to reduce debt.

Acquiring a Fixed Asset

Use of cash because the company spends money to purchase long-term assets.

Selling a Fixed Asset

Source of cash because selling the asset brings cash into the company.

Common-Size Balance Sheet

Shows each balance sheet account as a percentage of total assets.

Common-Size Income Statement

Shows each income statement item as a percentage of sales.

Purpose of Standardized Financial Statements

Makes it easier to compare a company over time and compare companies of different sizes.

Asset, Source of cash

down

Liability, Source of cash

up

Equity, Source of cash

up

Asset, Use of cash

up

Liability, Use of cash

down

Equity, Use of cash

down