What is the cash flow statement for?

"Gregory L. Hansen" wrote

That's true to some extent. Most businessses obtain their cash from operations. The cash flow statements reconciles the book profit/loss to the changes in cash from the begining of the year to the end of the year (or quarter, month or week). This is accomplished by removing those non-cash items from the income statement and adding or subtracting changes in the balance sheeet items.

Those are part of the income statemetn, and have already been accounted for there. If you are curious about those items, examine the income statement.

But why do it that way? If we're interested in the cash situation of a company, I'd have thought it would be more illuminating to look at the cash. I suppose in the end it's the same thing, the information is there somewhere, but it's like looking at a negative.

Depreciation expense is also on the income statement. The income statement includes things like "Cost of sales, including certain buying, occupancy, and warehousing expenses". I suppose most of that must be cash, but I don't know how much might be prepaid or deferred or amortized or whatever. The statement of cash flows has entries for things like accounts payable, but doesn't say how much of that is related to selling (like cost of raw materials) and how much is for fixed expenses.

It just seems... funny.

"Gregory L. Hansen" wrote

And that's what you are doing. Accounting for the changes to cash from the begining of the period to the end of the period. That is accomplished by eliminating the non-cash items on the income statement and adjusting for any balance sheet changes.

Changes in certain items, like a decrease in a payable or other liability decreased cash, and the cash flow statement tells you that. An increase in a liability, like an increase in a loan, increases cash, and you get to learn about that from the cash flow statement.

But that's a non-cash expense that needs to be adjusted bask on a cash flow statement.

Prepaid and accrued items are balance sheet items, and any changes to them (like booking the rent expense by decreasing pre-paid rents) will show up on the cash flow statement.

If you need the details of the expenses and revenues, you should be asking for more detailed financials.

Most of the publicly held companies report "lumped" revenues and expenses, but you can bet the farm that there are more detailed reports out there.

On Sun, 30 Oct 2005 18:09:41 +0000 (UTC), in alt.accounting snipped-for-privacy@steel.ucs.indiana.edu (Gregory L. Hansen) wrote in :

There are two ways to produce a statement of cash flows, one is direct, the way you appear to expect it to be done. The other is indirect, the way finance people expect it to be done because it ties in directly with the P&L. The example you cited was an example of the indirect method.

In the direct method, you report on the transactions that have affected the cash flow, so depreciation is ignored, but investments and financing activies are included, what you don't do is show how this is related to the P&L.

To consider a cash flow statement as a reconciliation exercise misses the point of why it is produced.

Its main purpose is as an analytical tool to examine how effectively a company is being financially managed. This link explains it more clearly than I could;

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On Mon, 31 Oct 2005 11:02:23 +1100, in alt.accounting "Rusty" wrote in :

Next time you respond to someone, it is considered good usenet etiquette to actually include what you are responding to.

If you had read what I wrote more carefully, you would not have accused me of calling it a reconciliation exercise.

Well David, I apologise for not including the message to which I was replying. I forgot to enable that option when I set up my new PC :-) Had I done it correctly it would have shown as a reply to Gregory's post and not yours.

My reply was intended to be general and in no way was it a criticism of your post. I am sorry it offended you.

Cheers, Ken

On Mon, 31 Oct 2005 12:14:11 +1100, in alt.accounting "Rusty" wrote in :

The reason I had brought it up was that my newsreader threads and it said that it was a response to me.

Thanks.

I realized that cash that doesn't show up on the income statement must show up there, too. Like in the case of depreciation expense that I'd been fixating on, somewhere in the beginning some peice of equipment was bought. Cash decreased and PPE increased in a way that balances the accounting equation, and the expense will be recognized over a period of years. But the cash all moved out in a day or so, and I'd think that would require an adjustment showing where cash went, rather than just where it didn't go.

For some reason my news server doesn't always seem to catch everything coming through, and if David had not taken offense and quoted it, I wouldn't have seen it. So it worked out all right for me.

i always use the image of tides flowing for cash flow statements...cash flowing in or out...then you have a few lines of info that are "non cash activities" in order to make the report tie back to the income statement and activity for the givin period...always starting and finishing with the bank balances....

"what is the sense of that"