How does the statement of cash flows relate to the balance sheet?


Quick Answer

The figures found in the statement of cash flows are pulled directly from the changes in balance sheet accounts throughout the year for a company, explains John A. Tracy from the "Accounting Workbook For Dummies." The increases and decreases in balance sheet accounts are the foundation for preparing a statement of cash flows because they drive the amounts shown in the statement.

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Full Answer

The changes in assets, liabilities and owners' equity are used to determine cash flow amounts. Increases and decreases in accounts receivable, inventories, prepaid expenses, accrued expenses payable, income taxes payable and accounts payable are all included in the operating activities sector of the statement of cash flows, according to Tracy.

The three primary financial statements, the income statement, balance sheet and statement of cash flows, are all interconnected, notes Investopedia. The purpose of the statement of cash flows is to illustrate the cash inflows and outflows of a company, and it ultimately divulges the total amount of cash the company has on hand; this is also disclosed on the balance sheet. The income statement, balance sheet and statement of cash flows only show a portion of a company's financial condition. However, when the financial statements are analyzed side-by-side, they paint a more complete picture of the business' financial health.

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