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Statement of Cash Flows

While the income statement and balance sheet are prepared using accrual accounting, the statement of cash flows measures the amount of cash that flows in and out of the business.

Sample Statement of Cash Flows

Cash Flow from Operations (Indirect Method)
Net Income 1,932
Add back: Depreciation 400
Minus: Increase in AR 4,500
Minus: Increase in Inventory (1,250)
Plus: Increase in tax payable 781
Plus: Increase in interest payable 190
Plus: Increase in AP 0
Cash Flow from Operations 6,553

Cash Flow from Investing
Short-term Investment (3,500)
Cash Flow from Investing (3,500)

Cash Flow from Financing
Debt issuance 0
Equity issuance 0
Dividends paid (50)
Cash Flow from Financing (50)

Net cash flow 3,003
Beginning cash balance 50
Ending cash balance 3,053

The statement of cash flows is made up of three parts:

  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows from financing activities

Cash flows from operating activities
Cash flows from operating activities relate to the company’s core activities. This section begins with net income and makes adjustments to it to transform the accrual-based net income number to one that is cash-based. For example, net income is net of depreciation expense. Because depreciation is not a cash outflow, it is added back to net income on the statement of cash flows.

It also accounts for changes in working capital accounts between two points in time to determine the net cash effect. Increases in current assets (A/R, Inventory) are a use of cash, while an increase in current liabilities (A/P) are a source of cash. The net effect of sources and uses of cash are reflected on the statement of cash flows.

Cash flows from operating activities = Net income + adjustment made to reconcile income to cash flow + changes in working capital

Cash flows from investing activities
Cash flows from investing activities cash flows reflect the purchase and sale of investments, PP&E (capital expenditures) and other long-term assets.

Cash flows from financing activities
Cash flows from financing activities are cash flows from the issuance and payment of debt and equity.

The net effect of the three parts is the net increase or decrease in cash flow during the period, or net cash flow. Adding the net cash flow to the beginning cash balance will give you the cash balance for the end of the period.

Net Cash Flow = Cash flows from operating activities + Cash flows from investing activities + Cash flows from financing activities