Statement of Cash Flows

• Author: Vern Krishna
• Pages: 270-275



Chapter 12: Statement of Cash Flows

A. OVERVIEW

e statement of cash ows provides details of an entity’s cash

management, which is an important aspect of a business. In accrual

accounting, income does not equal cash. e statement of cash ows

is a supplementary source of information to the other nancial state-

ments and provides a dierent perspective.

A successful business that reports growing net income may, never-

theless, run into nancial diculties if it cannot collect its revenues or

there is undue delay between the time of its sales and the time that it

collects its cash. Similarly, businesses must be sensitive to their ability

to pay their expenses as they become due. Even successful businesses

can have liquidity problems in paying their accounts because of cash

shortages.

By comparing an enterprise’s current balance sheet with a previous

balance sheet, we can obtain useful information about its cash ows.

B. COMPONENTS OF STATEMENT

e statement of cash ows essentially reconciles opening and closing

cash (and cash equivalents) for the scal period covered in the Bal-

ance Sheet. However, unlike the income statement, which uses accrual

accounting to record revenues and expenses, a cash ow statement