The cash flow statement shows the business’s beginning and ending cash balance. So, think of it like this: how much cash are you starting out with at the beginning of the month ... let's say $1,000. Now how much income did you take in? Let's say we made $3,000 cash in the month. Now, what were the expenses, including interest and principle payments on debt? (This is an important difference to note as well. The income statement is an operating profit statement so it will only report interest on a loan payment. In theory, a principle payment is applied towards an asset buying you equity, technically a balance sheet item but the cash flow statement wants to know about all cash transactions which includes both interest and principle payments.)
Let's say we had $2,000 in expenses so ... what is the ending cash position:
| Starting Cash | $1,000 |
| Income | $3,000 |
| Expenses | $2,000 |
| Ending Cash | $2,000 |
Table 12-1
See how the math works in the example? The starting balance is increased by the cash inflow and detracted from by the outflow.
Also, the cash flow statement wants to know the sources and uses of cash from three major sources: operations, financing and investing.
Cash flow from operations comes from the making and selling of product and can be thought of as the cash that comes from the income statement and summarily from the operations of the business.
Financing activities can be the retirement of debt, taking on new debt and distributing a dividend.
Investing activities can include the purchase of building and/or equipment and short-term assets such as marketable securities.
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