In order to prepare a statement of cash flows , you have to look back at the comparative balance sheets for XYZ company. From the two years of balance sheet data and some income statement data, you build your cash flows statement.

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The Statement of Cash Flows has three sections. The first section is Cash Flows from Operating Activities. Line 1 of this section is Net Income.

To net income, add Line 2, which is depreciation. After taking net income and depreciation into account in the section for operating activities, you then consider any increases or decreases in your current asset and current liability accounts between the two years of balance sheet information provided by the comparative balance sheets. Since that increase occurred on the asset side of the balance sheet, it is shown as a negative figure.

A decrease in asset account , a source of funds to the firm, is a positive number. It will soon become clear why. Now, look at the liabilities section of the balance sheet. Since this is a decrease in a liability account, it is a use of funds to the firm and a negative number.

Line 8 is Net Cash Flows from Operating Activities, the summary of the first section of the Statement of Cash Flows.

Statement of Cash Flows Indirect Method | Format | Example

The firm is generating a positive net cash flow from its operating activities. The next section of the Statement of Cash Flows is Cash Flows from Investing Activities.

Usually, this section includes any long-term investments the firm makes plus any investment in fixed assets , such as plant and equipment.

That shows up as a negative number as it was a use of assets. Line 11 is Net Cash Flows from Investing Activities, the summary of the second section of the Statement of Cash Flows. The last section of the cash flow statement is Cash Flows from Financing Activities.

Now, we combine the three sections of the cash flow statement to see where the firm is from a cash flow perspective. This is the net increase in cash flows over the year for the business firm. Looking back at the cash account on the comparative balance sheets, the analysis is correct.

How to Prepare a Statement of Cash Flows

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