Financial Management: Principles and Applications, 13/e

3.5 The Cash Flow Statement

We now move on to the third financial statement we want to review. The cash flow statement is a report, like the income statement and balance sheet, that firms use to explain changes in their cash balances over a specific period of time (i.e., one year or one quarter) by identifying all of the sources and uses of cash for that period. Thus, the focus of the cash flow statement is the change in a firm’s cash balance for the period covered by the statement:

$$\begin{array}{cccc}\begin{array}{l}\text{Change in Cash}\\ \text{Balance}\end{array}& =& \begin{array}{l}\text{Ending Cash}\\ \text{Balance}\end{array}& \begin{array}{cc}-& \begin{array}{l}\text{Beginning Cash}\\ \text{Balance}\end{array}\end{array}\end{array}$$(3–6)

Because the beginning cash balance for one year is the ending balance for the previous year, we typically evaluate Equation (3–6) as shown in the following example:

$$\begin{array}{c}\begin{array}{l}\text{Change in Cash Balance ...}\end{array}\end{array}$$