Profit and Cash Flow from Profit: Not Identical Twins!

At this point we shift gears. Chapter 4 through 12 (except for Chapter 6) walk down the income statement. Each chapter explains how sales revenue or an expense is connected with its corresponding asset or liability. In short, sales revenue and expenses cause changes in assets and liabilities. You can't understand the balance sheet well without understanding how sales revenue and expenses drive many of the assets and liabilities in the balance sheet.

This chapter is the first of two that explain the statement of cash flows, which is the third primary financial statement reported by businesses in addition to the income statement and balance sheet. Exhibit 13.1 at the start of the chapter presents the cash flows statement of the business we have discussed since Chapter 1. Please take a moment to read down this statement. I'll make you a wager here. I bet you understand the second and third sections of the statement (investing activities and financing activities) much better than the first section (operating activities).

Exhibit 13.1 shows the balance sheets of the company at the start and end of the year and includes a column for changes in assets, liabilities, and stockholders' equity. This chapter focuses on the first section of the cash flows statement, which presents cash flows from the company's operating activities (i.e., its profit-making activities) during the ...

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