For example, the income statement does not report the following: However, the income statement does not measure and report the amounts of cash that flowed in and out of the company. This method of accounting best measures a company's sales, expenses, and earnings during a short time interval. While the income statement amounts make the news, the amounts are based on the accrual basis of accounting.
A complete set of financial statements consists of five financial statements and the notes to the financial statements: Accordingly, the generally accepted accounting principles (GAAP, US GAAP) require that the statement of cash flows be part of a set of financial statements distributed outside of a company. The accounting profession realizes that reading only one or two financial statements is not sufficient for understanding a company's finances and operations. We begin with reasons why the statement of cash flows (SCF, cash flow statement) is a required financial statement.Ĭonfused? Send Feedback Why the Cash Flow Statement is Required The notes provide additional information such as disclosures of significant exchanges of items that did not involve cash, the amount paid for income taxes, and the amount paid for interest. The cash flows from financing activities section reports the cash flows associated with the issuance and repurchase of a corporation's bonds and capital stock, the payment of dividends, and the borrowing and repayment of short-term and long-term loans.Īt the bottom of the SCF (and other financial statements) is a reference to inform the readers that the notes to the financial statements should be considered as part of the financial statements. The cash flows from investing activities lists the cash flows associated with the purchase and sale of noncurrent (long-term) assets such as investments and property, plant and equipment. It is followed with adjustments to convert the amount of net income from the accrual method to the cash amount. With the most likely used indirect method, the starting point of this section is the company's net income. The cash flows from operating activities section provides information on the cash flows from the company's operations (buying and selling of goods, providing services, etc.). Given our assumption that the company does not have cash equivalents, the following is a skeleton of the SCF's format: Therefore, our SCF will explain the change in the company's cash from the beginning of the year to the end of the year (or the beginning of the quarter to the end of the quarter, etc.). For simplicity, we will assume that the company does not have cash equivalents. The amounts on the SCF provide the reasons for the change in a company's cash and cash equivalents during the period covered. Two examples include "Year ended December 31, 2021" and "Three months ended September 30, 2021". The time interval (period of time) covered in the SCF is shown in its heading.
The SCF reports the cash inflows and cash outflows that occurred during the same time interval as the income statement. The cash flow statement is required for a complete set of financial statements. We will use these names interchangeably throughout our explanation, practice quiz, and other materials.
The cash flow statement is the name commonly used by practicing accountants for the statement of cash flows or SCF.
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