IN THIS CHAPTER
Clarifying why the statement of cash flows is reported
Presenting the statement of cash flows in two flavors
Earning profit versus generating cash flow from profit
Reading lines and between the lines in the statement of cash flows
Offering advice and observations on cash flow
You could argue that the income statement (Chapter 5) and balance sheet (Chapter 6) are enough. These two financial statements answer the most important questions about the financial affairs of a business. The income statement discloses revenue and how much profit the business squeezed from its revenue, and the balance sheet discloses the amounts of assets being used to make sales and profit, as well as its capital sources. What more do you need to know? Well, it’s also helpful to know about the cash flows of the business.
This chapter explains the third primary financial statement reported by businesses: the statement of cash flows. This financial statement has two purposes: It explains why cash flow from profit differs from bottom-line profit, and it summarizes the investing and financing activities of the business during the period. This may seem an odd mix to put into one financial statement, but it actually makes sense. Earning profit (net income) generates net cash inflow (at least, it should normally). Making profit is a primary source of cash to a business. The investing and financing transactions of a business ...