The ending balance of a cash-flow statement will always equal the cash amount shown on the company's balance sheet. Cash flow is, by definition, the change in a company's cash from one period to the next. Therefore, the cash-flow statement must always balance with the cash account from the balance sheet.
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Understanding what the cash-flow statement is telling us
In accrual accounting, some transactions that impact a company's cash position are not always easy to recognize. On the one hand, expense accounts, like rent, payroll, or utilities, are easily recognized as uses of cash. These expenses are paid as they are incurred, and are clear to see on the income statement.
However, other line items work differently, and their impact on cash can be less obvious. For example, if a company makes a sale, that sale may or may not generate cash. If the company offers a customer 30 days to pay, then the sale will show as revenue on the income statement even though no cash has been collected. In that case, the sale would increase accounts receivables on the balance sheet, not cash. It's only a cash event when the cash is actually collected in 30 days.
That example is illustrative of how changes in cash are driven not just by income-statement items like sales, salaries, or rent, but also by balance-sheet items like inventory, accounts receivable, debt, fixed assets, and more.
The cash-flow statement exists to bring transparency to how both the balance sheet and income statement impact a company's cash positions.
The organization of the cash-flow statement.
The cash-flow statement is structured into three primary sections: cash from operating activities, cash from investing activities, and cash from financing activities. Between these three sections, the cash-flow statement fully accounts for the change in cash on the balance sheet from one period to the next.
The cash from operating activities takes the company's net income, and adjusts it to account for the sources and uses of cash in the company's current assets and current liabilities. Current assets and liabilities are short-term items, usually closely associated with the operations of the company.
The cash from investing activities section accounts for the sources and uses of cash in the company's longer-term assets, like buildings, vehicles, equipment, and so on. Purchasing a building requires the company to spend cash, even though the cost of the building doesn't show up on the income statement as an expense. This section captures that use of cash, and others like it.
The final section -- cash from financing activities -- accounts for the sources and uses of cash in the company's long-term liabilities and stockholders' equity. For example, if the company used a bank loan to purchase the building mentioned above, that loan would be a source of cash, and would appear in this section. Again, that bank loan would not appear on the income statement, and could easily be missed if not for the statement of cash flow.
Summing up these three sections will result in the actual change in cash for that period. This number will always balance the cash accounts on the balance sheet from one period to the next.
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