Net change in cash and cash equivalents

Putting it all together: The statement of cash flows

The cash flows from operating, investing and financing activities are all combined in one statement of cash flows. The subtotals of each activity is combined to a singular sum commonly referred as “net change in cash and cash equivalents”.

The net change in cash and cash equivalents is then added to the beginning balance of cash to arrive at the ending balance. Under US GAAP (ASU 2016-18), this ending balance includes restricted cash, so the total reconciled is cash, cash equivalents, and restricted cash, which should agree to the corresponding amount disclosed in the statement of financial position.

As you may have already noted, the statement of cash flows can be derived from movements of balance sheet accounts. The general treatments are summarized below:

Mapping balance sheet accounts to their related cash flow statement classifications. — Balance Sheet Cash Flow Mapping

See below combined statement of cash flows using the indirect method for the operating activities:

Proforma combined cash flows (indirect method)

Pitfall: net income and operating cash flow diverge because net income is accrual-based while cash flow tracks actual cash; non-cash charges like depreciation are added back, and a rise in receivables ties up cash despite boosting revenue. Example: $50,000 net income + $15,000 depreciation − $70,000 increase in receivables = −$5,000 operating cash flow - negative despite positive net income.

Purpose and limitations of the statement of cash flows

The following a some of the purposes of the statement of cash flows:

Cash flow information helps assess the company’s financial flexibility and risk
It helps assess the company’s liquidity, which is the ability of the company to generate cash flows to service their obligations when they become due. However this may lead to some limitations (see below)
It helps users understand the prospects for future cash flows of the company
Since the income statement is prepared using the accrual method, the statement of cash flows can help explain the difference between the cash flows and the company’s net income

The following are some limitations of the cash flow statement:

The cash flow statement is not a direct measure of profitability because it reports cash movements rather than accrual-based earnings; significant non-cash investing and financing activities are still disclosed separately under US GAAP (ASC 230)
The cash flow statement may not provide the full context of the company’s liquidity since payments can be delayed to show positive net inflows during the period. This is why the statement of cash flows should be analyzed in the context of other financial information
The statement of cash flows may be complicated to prepare for consolidated financial statements with several entities

Statement of Cash Flows Structure

Combines operating, investing, and financing cash flows
Net change in cash and cash equivalents: sum of all activities
Ending cash balance = beginning balance + net change; matches balance sheet

Cash Flow Treatments

Derived from changes in balance sheet accounts
Specific treatments for assets, liabilities, and equity changes
Reference summary table for detailed account impacts

Indirect Method (Operating Activities)

Starts with net income
Adjusts for non-cash items and changes in working capital
Commonly used format for presenting operating cash flows

Purpose of the Statement of Cash Flows

Assesses financial flexibility and risk
Evaluates liquidity (ability to meet obligations)
Explains differences between net income and cash flows
Provides insight into future cash flow prospects

Limitations of the Statement of Cash Flows

Does not measure profitability (excludes non-cash items)
May not fully reflect liquidity (timing of payments can distort inflows)
Preparation complexity increases with consolidated entities