The key purpose of the statement of cash flows is to provide important information about the cash receipts and cash payments of an organization during a period. Financial statements do not provide an efficient or expedient source of cash flow data. Therefore, the Financial Accounting Standards Board (FASB) requires companies to present the statement of cash flows as one of the basic financial statements under the generally accepted accounting principles (GAAP). There are two methods for preparing the statement—the direct method and the indirect method. Within both of these methods, there are three activities related to cash flows: operating, investing, and financing. An additional section, the noncash investing and financing section, is used when financing and investing items occur that do not involve cash.
At A Glance
The statement of cash flows is a key financial statement that classifies cash receipts and cash payments by operating, investing, and financing activities. The statement also shows, in the notes, noncash investing and financing activities.
- The Securities and Exchange Commission (SEC) is an independent government agency that enforces laws and regulates the securities industry. The Financial Accounting Standards Board (FASB) is an independent nonprofit standard-setting group.
The indirect method for preparing the cash flow statement is favored by industry and includes net cash flows from operating, financing, and investing activities.
- There are three steps to prepare the statement of cash flows using the indirect method: determine the change in cash balance, establish new cash flows from operating activities, and compile the cash flows from investing and financing activities.
Cash flows from operating, investing, and financing activities include cash from each specific activity.
An optional spreadsheet for preparing the statement of cash flows is useful in analyzing accounts, retained earnings, and other accounts.