Statement of Cash Flows

Statement of Cash Flows



We already have established the importance of cash flows to investors and creditors and that the cash flows of the company are important consideration in investors and creditors assessment of cash flows to them. As a result, a second set of information that a particularly important concerning hot the financial position changed between two points in time (that is, the beginning and end of a month or year) is cash flow information.

We can use the entire cash column of the previous analysis to create for overnight auto service a statement of cash flows. That statement will classify the various cash flows into three categories – operating, investing and financing – and relate these categories to the beginning and ending cash balances. Cash flows from operating activities are the cash effects of revenue and expense transactions that are included in the income statement. Cash flows from investing activities are the cash effects of purchasing and selling assets. Cash flows from financial activities are the cash effects of the owner investing in the company and creditors loaning money to the company and the repayment of either or both.

Notice that the operating, investing, and financing categories include both positive and negative cash flows. (The negative cash flows are in parentheses.) Also notice that the combined total of the three categories of the statement explains the total change from the beginning to the end of the month. From November, the beginning balance was zero because the company was started in November. For December, Overnight’s beginning cash balance will be $16000, and the statement of cash flows will explain how that numbers either increased to a higher balance or was reduced to a lower balance, as a result of its cash activities during that month. Notice also that several transactions and parts of transactions had no cash effects, therefore are not included in the statement of cash flows. For example, on November 5, overnight purchased land for $36000 only $6000 of which was paid in cash. The remaining $30000 is not included in the statement of cash flows. Similarly, on November 17, overnight purchased tolls and equipment for $13800 paying no cash at that time. That transactions has no cash effects on November 17, although the cash payment of $6800on November 26, which is a continuation of that transaction, did affect cash is included in the statement of cash flows. Transactions that did not affect cash are called non cash investing and financing transactions. In a formal statement of cash flows, such transactions are required to be noted as we explain later in this text, even though they do not affect the actual flow of cash into and out of the company.

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