Statement of Cash Flows | Intro

Module 2:
Completing the Accounting Cycle

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Understand the purpose of the Statement of Cash Flows

➛ Explain why profit is different from cash

➛ Identify cash inflows and cash outflows

➛ Classify cash flows into operating, investing, and financing activities

➛ Recognize the importance of cash flow for business survival

➛ Statement of Cash Flows
➛ Cash Inflow
➛ Cash Outflow
➛ Operating Activities
➛ Investing Activities
➛ Financing Activities
➛ Net Cash Flow

The Statement of Cash Flows shows how cash moved in and out of the business during a period.

It answers the question
Where did the cash come from and where did it go?

A business can be profitable but still run out of cash.

➛ Cash pays expenses
➛ Cash repays loans
➛ Cash keeps the business operating

Profit ≠ Cash
Cash flow determines liquidity

Operating Activities
➧ Cash received from customers
➧ Cash paid for expenses

Investing Activities
➧ Purchase of equipment
➧ Sale of assets

Financing Activities
➧ Owner investments
➧ Loans received or repaid

➛ Statement of Cash Flows
➛ Cash from Operating Activities
➛ Cash from Investing Activities
➛ Cash from Financing Activities
➛ Net Increase/Decrease in Cash

Indicate whether each is a cash inflow or cash outflow

➛ Cash received from customers
➛ Cash paid for rent
➛ Owner invests cash
➛ Purchase of equipment for cash
➛ Bank loan received

Classify each transaction

Cash vs Profit



Task
Explain how profit can exist even though cash decreased.

➛ Cash flow and profit are the same.

➛ Buying equipment affects cash flow.

➛ Loan proceeds are operating activities.

➛ Cash received from customers is an operating activity.

➛ Statement of Cash Flows explains changes in cash balance.

A profitable retail shop struggles to pay suppliers on time.

Questions

➛ Which financial statement best explains this problem?

➛ Why can a profitable business face cash shortages?

➛ Which section shows cash from daily operations?

➛ Where would loan proceeds appear?

➛ Why is cash flow analysis important for managers?

➛ What is the purpose of the Statement of Cash Flows?

➛ Name the three sections of the statement.

➛ True or False | Equipment purchase is an operating activity.

➛ Which activity includes owner investment?

➛ What does net cash flow represent?

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Answers ➧ Here

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Comprehensive Financial Statement Preparation ➧ Here