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Cash Flow Statement Interrelationship

Discuss the interrelationship of the cash flow statement to the other financial statements. In your discussion comment and explain operating activities, investing activities, and financing activities. What is the difference between an indirect and a direct cash flow statement? Which is GAAP?

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The cash flow statement is designed to present a picture of receipts and disbursements of cash for the purpose of projecting finance needs. It looks like this:

Beginning Cash

+ Cash from Operations
+ Cash from Investing
+ Cash from Financing

- Cash for Operations
- Cash for Investing
- Cash for Financing

= Ending Cash

If the ending cash position is the amount needed for cash for the next operational cycle (or if cash exceeds the amount required) then the firm needs do nothing except proceed to the next operational cycle. If the cash position is less than that needed (or negative), then the firm needs to make a decision regarding how to make up the difference. Does the firm borrow short term? Does the firm look at means to raise additional working capital, perhaps through Sales, promotions, and the like? Does the firm look at a combination of increasing sales and decreasing costs? So there are options which can be pursued.

But the most important point is that the cash flow statement be built and forecast for the next operational cycle so that any abnormalities in cash needs can be identified BEFORE it becomes critical to the successful operations of the firm ---- the best time to borrow money ...

Solution Summary

Presents information relative to the cash flow statement - how it is constructed and managed for decision making purposes.