How to Read a Financial Report, 10th Edition

16CONNECTING THE CASH FLOW DOTS

Profit versus Cash Flow from Profit

At this point, I 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.

The first part of this chapter focuses on how the changes in a company’s assets and liabilities during the period determine cash flow from net income (profit) for the period. The second part takes the statement of cash flows one step further, summarizing how a company invests cash in addition to its financing activities.

The statement of cash flows is one of the three primary financial statements reported by businesses, in addition to their income statement and balance sheet. Exhibit 16.1 presents the statement of cash flows for the business I have discussed since Chapter 2. Please take a moment to read this statement from top to bottom. I’ll make you a wager here. I 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 16.1 lists the balance sheet accounts of the company to close out the prior FYE 12/31/22 and at the end of the current FYE 12/31/23; it includes ...