Introduction to Cash Flow StatementThe official name for the cash flow statement is the statement of cash flows. We will use both names throughout AccountingCoach.com.

The statement of cash flows is one of the main financial statements. (The other financial statements are the balance sheet, income statement, and statement of stockholders' equity.)

The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. For example, the heading may state "For the Three Months Ended December 31, 2014" or "The Fiscal Year Ended September 30, 2014".The cash flow statement organizes and reports the cash generated and used in the following categories:

What Can The Statement of Cash Flows Tell Us?Because the income statement is prepared under the accrual basis of accounting, the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement.

Here are a few ways the statement of cash flows is used.

1. The cash from operating activities is compared to the company's net income. If the cash from operating activities is consistently greater than the net

income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash.

2. Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are perceived to be good for stockholder value.

3. Some financial models are based upon cash flow.

Format of the Statement of Cash FlowsThe statement of cash flows has four distinct sections:

1. Cash involving operating activities2. Cash involving investing activities3. Cash involving financing activities4. Supplemental information.

Assuming that the cash flow statement is being prepared using the indirect method (the method used by most companies) the differences in a company's balance sheet accounts will provide much of the needed information. For example, if the statement of cash flows is for the year 2014, the balance sheet accounts at December 31, 2014 will be compared to the balance sheet accounts at December 31, 2013. The changes—or differences—in these account balances will likely be entered in one of the sections of the statement of cash flows.Shown below is each of the four sections of the statement of cash flows, followed by a list of those balance sheet accounts which affect it.

1. Cash Provided From or Used By Operating ActivitiesThis section of the cash flow statement reports the company's net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of current asset and current liability accounts, such as:

Accounts Receivable Inventory Supplies Prepaid Insurance Other Current Assets Notes Payble Accounts Payable Wages Payable Payroll Taxes Payable Interest Payable Income Taxes Payable Unearned Revenues Other Current LiabilitiesIn addition to using the changes in current assets and current liabilities, the operating activities section has adjustments for depreciation expense and for the gains and losses on the sale of long-term assets.

2. Cash Provided From or Used By Investing ActivitiesThis section of the cash flow statement reports changes in the balances of long-term asset accounts, such as:Long-term InvestmentsLandBuildingsEquipmentFurniture & FixturesVehiclesIn short, investing activities involve the purchase and/or sale of long-term investments and property, plant, and equipment.

3. Cash Provided From or Used By Financing ActivitiesThis section of the cash flow statement reports changes in balances of the long-term liability and stockholders' equity accounts, such as:Notes Payable (generally due after one year) Bonds Payable Deferred Income Taxes Preferred Stock 

Paid-in Capital in Excess of Par-Preferred Stock Common Stock Paid-in Capital in Excess of Par-Common Stock Paid-in Capital from Treasury Stock Retained Earnings Treasury StockIn short, financing activities involve the issuance and/or the repurchase of a company's own bonds or stock as well as short-term and long-term borrowings and repayments.

The income statement for the month of February shows revenues (or sales) of $800. Under the accrual basis of accounting—revenue is recognized when title passes (at the time of shipment or time of delivery), not when the money is received. Expenses (such as the cost of goods sold for $500) appear on the income statement when they best match up with revenues, not when the expenses or goods are paid for. (Other expenses will also appear on the income statement when they are used, not when they are paid for.) As a result of the accrual basis of accounting, the income statement reports $300 of net income even though there was no cash inflow or cash outflow during February.

As you can see above, the cash flow statement for the month of February reports no change in cash. That agrees with the company's balance sheet that reported Cash of $1,300 on January 31 and will show $1,300 on February 28.

The year-to-date net income of $300 increases the owner's equity on the balance sheet. Please note the connection between the bottom line of the year-to-date income statement and the change in Matt Jones, Capitalon the balance sheet. Matt Jones, Capital has increased from $2,000 to $2,300.