Accounting For Dummies®, 4th Edition

Chapter 6. Reporting Cash Flows

In This Chapter

• Earning profit versus generating cash flow

• Presenting the statement of cash flows

• Analyzing the cash flow from making profit

• Scrutinizing the statement of cash flows

Suppose that a business's cash balance decreases $110,000 during the year. You see this decrease in the company's balance sheets for the years ended December 31, 2008 and 2009. The business started the year with $2,275,000 cash and ended the year with $2,165,000 (as in the business example I use in Chapters 4 and 5.) What does the balance sheet tell you about the reasons for the cash decrease? Well, not a whole lot. Answering such a question is not the nature or purpose of a balance sheet.

One possibility is that the business suffered a large loss in 2009 that caused a drain on cash. You can look at its 2009 income statement to find out whether the business had a loss or made a profit, but this financial statement does not report the cash flow effect from the loss or profit. Another possibility for the cash decrease is that the business paid down its debt. Or perhaps the company made large investments in new machines and equipment during the year. Where do you look for such information? Answering this question is the main purpose of this chapter, which introduces the third key financial statement: the statement of cash flows.