How to Read a Financial Report, 9th Edition

14 CASH FLOW FROM OPERATING (PROFIT-SEEKING) ACTIVITIES

Profit Versus Cash Flow from Profit

At this point we shift gears. Earlier chapters focus on how sales revenue and each expense in the income statement is connected with its corresponding asset or liability in the balance sheet. You can’t understand a balance sheet too well without understanding how sales revenue and expenses drive many of the assets and liabilities in the balance sheet. In this chapter we focus on how the changes in these assets and liabilities during the period determine cash flow from net income (profit) for the period.

This chapter is the first of two that further explain the statement of cash flows. This cash flows statement is one of the three primary financial statements reported by businesses, in addition to their income statement and balance sheet. Exhibit 14.1 presents the statement of cash flows for the business we have discussed since Chapter 1. Please take a moment to read this statement from top to bottom. We’ll make you a wager here. We bet you understand the second and third sections of the statement (investing activities and financing activities) better than the first section (operating activities). Indeed, your reaction to the first section might be that it’s all Greek to you.

EXHIBIT 14.1 CASH FLOW FROM OPERATING (PROFIT-MAKING) ACTIVITIES

Exhibit 14.1 lists the balance sheet accounts ...