Elements of the cash flow statement The cash flow statement is an analysis of the sources and uses of cash

by the company. If assets = liabilities + shareholders' equity, then Cash + other assets = liabilities + shareholders' equity and Cash = -other assets + liabilities + shareholders' equity and Cash = -other assets + liabilities + shareholders' equity where Cash is the chan e in the cash account - the focus of the cash flow statement. Cash flow statements ha!e three parts - operatin , in!estin and financin . In addition, interest paid and ta"es paid are required bits of supplemental information. Then Cash = Cash pro!ided by operations + Cash due to in!estin + Cash due to financin The chan e in cash due to operations focuses on income and eliminates and ad#usts for noncash elements of operations to arri!e at cash pro!ided by operations. The chan e in cash due to in!estin focuses on the company's non-operatin assets. E"amples include capital e"penditures, in!estments, acquisitions and di!estitures for cash. The chan e in cash due to financin focuses on the company's non-operatin liabilities and owners' equity. E"amples include chan es in notes payable, bond issues and retirements and common stoc$ issues and stoc$ buybac$s. %lso, di!idend payments are included in the financin section of the cash flow statement There are two types of cash flow statements - the direct cash flow statement and the indirect cash flow statement. The direct cash flow statement is basically a cash T - account split into the three components. The indirect cash flow statement also has three parts. The in!estin and financin sections are identical in form and flows to what would be seen in the direct cash flow statement. The only difference appears in the section reportin operatin flows. The reported net operatin cash flow from operations is identical irrespecti!e of whether the direct or indirect method is used. &owe!er, whereas the direct method shows actual flows, the indirect method calculates the flows based on the company's other accounts startin with income 'in essence, the 'other' side of the accountin double entry system(, addin bac$ non cash outflows reported as e"penses, subtractin non cash inflows reported as re!enues and ad#ustin for chan es in the company's operatin assets and liabilities. The formula for cash pro!ided by operations is) *et income + *on cash e"penses 'such as depreciation( *on-cash re!enues 'such as accrued interest income( Increases in operatin assets 'cash not yet recei!ed( + decreases in operatin assets 'additional cash recei!ed( + increases in operatin liabilities 'cash not yet paid( decreases in operatin liabilities 'additional cash paid(

*otes) +peratin assets and liabilities are primarily short-term assets and liabilities. &owe!er, assets such as cash 'the focus of the analysis(, mar$etable securities and short-term debt 'both considered in!estin or financial rather than operatin ( are e"cluded from the operatin portion of the analysis. +peratin cash flows include interest payments and ta" payments. +peratin income does not include interest e"pense or ta" e"pense. +peratin cash flows include di!idends recei!ed, interest recei!ed and interest paid. &owe!er, di!idends paid are reported in the financin section of the cash flow statement. +peratin cash flow can !ary substantially in si,e and trend from income. Cash flows are free of many accountin options that affect accountin income. -ince accountin choices are used to mana e income, cash flows are not mana ed as much as income. &owe!er, cash flows may be harder to interpret as the natural lumpiness of cash flows 'as opposed to the smooth accrual of income( may be more difficult to predict.