Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 584

Financial Statements

Chapter 18

Student Guide

Statement of Cash Flows2.3.9Lesson 18.4

The statement of cash flows divides cash inflows (receipts) and outflows (payments) into three primary

categories of cash flows in a typical business:

1. Cash flows from operating activities


2. Cash flows from investing activities


3. Cash flows from financing activities
   The heading identifies the name of the company, the title of the report, the unit of measure used, and the
   date. Like the income statement, the cash flow statement covers a specified period of time.

As discussed earlier, reported revenues do not always equal cash collected from customers because some

sales may be on credit (accounts receivable). Also, expenses reported on the income statement may not be

equal to the cash paid out during the period because expenses may be incurred in one period and paid for

in another. Because the income statement does not provide information concerning cash flows, accoun-

tants prepare the statement of cash flows to report inflows and outflows of cash. The cash flow statement

equation describes the causes of the change in cash reported on the balance sheet from the end of the last

period to the end of the current period:

+/- Cash Flows from Operating Activities (CFO)

+/- Cash Flows from Investing Activities (CFI)

+/- Cash Flows from Financing Activities (CFF)

Change in Cash

Elements

Cash flows from operating activities are cash flows that are directly related to earning income. This sec-

tion lists cash received from customers and cash payments from normal daily activities. The net amount is

reported as cash provided by operating activities.

Cash flows from investing activities include cash flows related to the acquisition or sale of the company’s

productive assets. Productive assets are purchases required to help the business keep up with demand.

Cash flows from financing activities are directly related to the financing of the enterprise itself. They involve

the receipt or payment of money to investors and creditors (except for suppliers).