Financial Accounting: In an Economic Context

THE STATEMENT OF CASH FLOWS

The statement of cash flows is a summary of the activity in a company's cash account over a period of time. Understanding the statement of cash flows is simply a matter of recognizing that certain transactions entered into by a company during a given period increase the cash account, while others decrease it. The statement summarizes these transactions and, in the process, explains how the cash balance at the beginning of the period came to be the cash balance at the end of the period. The statement of cash flows for Harbour Island Company for the year ended December 31, 2011, appears in Figure 2-6.⁶

The statement of cash flows is divided into three basic categories: (1) operating activities, (2) investing activities, and (3) financing activities. The transactions summarized within each of these three categories either increased or decreased cash during the period, and the net result of the three totals explains the change in a company's overall cash balance. For example, on Harbour Island's cash flow statement, operating activities increased cash by $1,470, investment activities decreased cash by $4,100, and financing activities increased cash by $2,750. The net result is $120 ($1,470—$4,100 + $2,750), the increase in the cash balance during 2011.

The statement of cash flows provides important information to investors and creditors, especially those who are interested in assessing a company's solvency position. In a recent survey of over 60,000 companies ...