What’s the purpose of the Statement of Cash Flows?
Over the course of a given accounting period, it's important to know where our cash is going.
However, the Balance Sheet only shows the balance of the Cash account...
BALANCE SHEET
| Account | Amount |
|---|---|
ASSETS | |
| Cash | $2,300 |
| Accounts Receivable | $0 |
| Equipment | $500 |
| Land | $0 |
| Total Assets | $2,800 |
LIABILITIES | |
| Notes Payable - Long Term | $1,500 |
| Wages Payable | $0 |
| Total Liabilities | $1,500 |
EQUITY | |
| Common Stock | $1,000 |
| Retained Earnings | $500 |
| Total Equity | $1,500 |
...it doesn't show how we got to that value from the beginning of the period!
Herein lies the value of the Statement of Cash Flows:
The Statement of Cash Flows shows us where cash is moving throughout a given period.
For example, we might have the following Cash Flow Worksheet...
...which would result in the following Statement of Cash Flows.
STATEMENT OF CASH FLOWS
| Account | Amount |
|---|---|
OPERATING ACTIVITIES | |
| Net Income | $1,000 |
| Add the Decrease in Accounts Receivable | $500 |
| Subtract the Decrease in Wages Payable | ($500) |
| Subtract Gain on Sale of Land | ($200) |
| Cash Provided by Operating Activities | $800 |
INVESTING ACTIVITIES | |
| Cash Provided by Sale of Land | $1,000 |
| Cash Used to Purchase Equipment | ($500) |
| Cash Provided by Investing Activities | $500 |
FINANCING ACTIVITIES | |
| Cash Provided from Notes Payable - Long Term | $1,500 |
| Cash Used to Pay Dividends | ($500) |
| Cash Provided by Financing Activities | $1,000 |
Total Increase in Cash over Period | $2,300 |
| Beginning Cash Balance | $0 |
| Increase in Cash over Period Cash Balance | $2,300 |
| Ending Cash Balance | $2,300 |
Let's dig into how we can use this Cash Flow Worksheet & Statement of Cash Flows to learn how our Cash balance changed over the period!