Financial Accounting For Dummies

Chapter 11

Following the Money by Studying Cash Flow

In This Chapter

Separating cash from profit and costs from expenses

Connecting the dots with the statement of cash flows

Learning about the sections of the statement of cash flows

Presenting cash flow using the direct or indirect method

While financial accounting is all about the accrual method, which means revenue is recorded when it is earned and realizable and expenses are recorded when they are incurred, the missing piece of the puzzle is cash changing hands. For the financial statements users to get a total picture of the health of the business, cash payments and receipts have to be reconciled with accrual transactions.

You accomplish this reconciliation by preparing a statement of cash flows. In this chapter, you find out about the three sections of the statement of cash flows — operating, investing, and financing — and what types of accounting information are reported in each.

To shake things up a little bit, there are currently two acceptable ways to prepare the statement of cash flows: using the direct method and the indirect ...