The statement of cash flows is a financial statement that reports the flow of cash into and out of a company in a given year resulting from the entity’s operating, financing and investing activities for the period. It reports the beginning and ending values for cash and cash equivalents each year and presents changes in the balance sheet account between two balance sheet dates. The changes in all balance sheet accounts reflect sources of cash (cash inflows) and uses of cash (cash outflows). Changes resulting from cash inflows less changes from cash outflows equal the changes in the cash balances.
The term cash flow is broadly used to refer to the net cash received in any period, taking into account net operating income, debt service, capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash. When the term is used in investments, it is sometimes called cash earnings and calculated by adding depreciation, amortization and noncash charges to net earnings and subtracting preferred dividends.
A source of cash is a change in a balance sheet account that, all other things being equal, results in an increase in cash, including decreases in assets and increases in liabilities and owners’ equity. Anytime an expense is incurred without a corresponding cash disbursement (e.g., accrued expense) or cash is received in a period other than the one in which it was earned (e.g., prepaid income), there is a source of cash in that period.
A use of cash is a change in a balance sheet account that, all other things being equal, decreases cash, including increases in assets and decreases in liabilities and owners’ equity. Anytime revenue is earned without a corresponding receipt of cash (e.g., accrued revenue) or a payment is made in a period different to the one in which the expense is recognized (e.g., prepaid expense), there is a use of cash in that period.
|Cash Inflow||Cash Outflow|
|− Asset Accounts||+ Asset Accounts|
|+ Liability Accounts||− Liability Accounts|
|+ Equity Accounts||− Equity Accounts|