CASH FLOW STATEMENT BASIC DEFINITION INFORMATION

What Is A Statement Of Cash Flow?

Remember that the Income Statement provides information about the economic resources involved in the operation of a company. However, the Income Statement does not provide information about the actual source and use of cash generated during its operations.

That’s because obtaining and using economic resources doesn’t always involve cash. For example, let’s say you went shopping and bought a new mountain bike on your credit card in July – but didn’t pay the bill until August.

Although the store did not receive cash in July, the sale would still be considered July revenue. The Statement of Cash Flows presents a detailed summary of all of the cash inflows and outflows during the period and is divided into three sections based on three types of activity:

• Cash flows from operating activities: Includes the cash effects of transactions involved in calculating net income.

• Cash flows from investing activities: Basically, cash from non-operating activities or activities outside the normal scope of business. This involves items classified as assets in the Balance Sheet and includes the purchase and sale of equipment and investments.

• Cash flows from financing activities: Involves items classified as liabilities and equity in the Balance Sheet; it includes the payment of dividends as well as issuing payment of debt or equity. This example shows the basic format of the Statement of Cash Flows:

As you can tell be looking at the above example, the Statement of Cash Flows gets its information from all three of the other financial statements:

• Net income from the Income Statement is shown in the section “cash flows from operating activities.”

• Dividends from the Statement of Retained Earnings is shown in the section “cash flows from financing activities.”

• Investments, Accounts Payable, and other asset and liability accounts from the Balance Sheet are shown in all three sections.