Accounting, 3rd Edition

Chapter 8

Main financial statement: The statement of cash flows

‘Cash is King. It is relatively easy to “manufacture” profits but creating cash is virtually impossible.’

UBS Phillips and Drew (January 1991), Accounting for Growth, p. 32.

Learning Outcomes

After completing this chapter you should be able to:

• Explain the nature of cash and the statement of cash flows.
• Demonstrate the importance of cash flow.
• Investigate the relationship between profit and cash flow.
• Outline the direct and indirect methods of the statement of cash flows preparation.

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Chapter Summary

• Cash is key to business success.
• Cash flow is concerned with cash received and cash paid, unlike profit which deals with income earned and expenses incurred.
• Reconciling profit to cash flow means adjusting for movements in working capital and for non-cash items, such as depreciation.
• Large companies provide a statement of cash flows as the third major financial statement.
• Sole traders, partnerships and small companies may, but are not required to, prepare a statement of cash flows.
• The two ways of preparing a statement of cash flows are the direct and the indirect methods.
• Most companies use the indirect method of preparing ...