How to Read a Financial Report, 9th Edition

3 REPORTING CASH FLOWS

Statement of Cash Flows

Chapter 2 introduces the two hardcore financial statements that are included in the financial report of a business, the income statement (Exhibit 2.1) and the balance sheet (Exhibit 2.2). Both of these provide a comprehensive summary of the financial performance and financial condition of the business; however, this is not the end of the story. Financial reporting standards require that a statement of cash flows also be presented for the same time period as the income statement.

This third financial statement, as its title implies, focuses on the cash flows of the period. The cash flow statement is not more important than the income statement and balance sheet. Rather, it discloses additional information that supplements the income statement and balance sheet.

Exhibit 3.1 presents the statement of cash flows for our business example. This financial statement has three parts, or layers: 1) cash flows from operating activities, 2) cash flows from investing activities, and 3) cash flows from financing activities. Operating activities relate to the profit-making activities of the business. Of course, a business may suffer a loss instead of making profit. On a statement of cash flows, the term “operating activities” refers to revenue and expenses (as well as gains and losses) during the period that culminate in the bottom-line net income or loss for the period.

EXHIBIT 3.1 STATEMENT OF CASH FLOWS FOR YEAR

Dollar Amounts in Thousands ...