Statement of Cash Flows

For a company’s financial statement to be in accordance with generally accepted accounting principles (GAAP), the statement of cash flows must be included as one of the four required financial statements. The other important financial statements or documents are Balance sheet, statement of retained earnings and the income statement.  

The statement of cash flows indicates the flow of cash within the company or business- where how the cash came from and how the cash was spent during the period reporting (which is usually a month, a quarter, or a year).  It also shows the cash flows of the company, divided into categories according to three major activities such as operating, investing and financing.  This is helpful to statement users, business owners, investors and creditors because it indicates the type of transaction that gave rise to each one of the cash flow.

Additionally, the statement of cash flows differs from the balance sheet and income statement in two key ways.  The balance sheet shows the financial status of a company at the end of the reporting period (a snapshot), but both the income statement and the statement of cash flows show the flow of activity during the reporting period ( a short movie compared to the snapshot that is the balance sheet). The second difference is that the income statement reports this activity on the accrual basis, and the statement of cash flows reports it on the ash basis.  Under the cash basis of accounting, revenue is not reported until cash is received and expenses are not reported until cash is disbursed.

The statement of cash flows enables the users to make decisions about the company. The statement of cash flows is more like the income statement than the balance sheet in that it is a change statement.

Questionnaire:

• What is statement of cash flows?
• What are the difference between statement of cash flows, balance sheet and income statement?