ACCOUNTING TUTORIALS
Part I Financial Statements and Basic Accounting Principles
Statement of Cash Flows
- Identifies the sources and uses of cash throughout fiscal year, by reporting changes in items on the balance sheet.
- Like the income statement and the statement of changes in owners’ equity, the statement of cash flows covers a period of time.
- Three general areas of activity are described on the statement of cash flows: operating activities, investing activities, and financing activities.
Cash flows from operating activities begin with net income. Net income connects the income statement to the statement of cash flows.
-Note that depreciation expense is added back into net income on the statement of cash flows. This is because depreciation expense affects net income, but it does not involve an expenditure of cash.
Cash flows from investing activities describe the cash expenditures used to purchase assets with long productive lives (plant equipment, etc.)
Cash flows from financing activities detail cash income from the sale of common stock and/or long-term debt.
Notes:
-The increase in accounts receivable is deducted because these sales revenues have not yet been collected, although they are included in net income.
-The increase in merchandise inventory is deducted because cash was expended to acquire it.
