Crash Course in Accounting and Financial Statement Analysis, Second Edition

Cash Flow Statement to the Rescue!

The cash flow statement (CFS) reconciles net income to a company’s actual change in cash balance over a period in time (quarter or year). It is a line-by-line reconciliation, starting with net income and ending with total change in cash balance.

Along with the income statement and the balance sheet, the cash flow statement is required by the Securities and Exchange Commission (SEC).

Unlike the income statement, whose primary purpose is to present a company’s operating performance, the major purpose of the cash flow statement is to present the movement of cash.

• The cash flow statement has become increasingly important for the purposes of financial analysis because the income statement and balance sheet can be manipulated through the use of different accounting methods and assumptions, while a company’s uses and sources of cash are objectively recorded when cash is paid and received, respectively.

Cash inflows/outflows are segregated into three major categories in the CFS (Exhibit 7.1):

1. Cash Flow from Operating Activities

   • Tracks cash generated in the course of a company’s day-to-day operations.

   • These cash flows typically track the cash impact of changes in current assets and current liabilities.

2. Cash Flow from Investing Activities

   • Tracks additions and reductions to fixed assets and monetary investments during the year.

   • These cash flows typically track the impact of changes in long-term assets.

3. Cash Flow from Financing Activities

   • Tracks changes in the ...