Statements of Cash Flow & Analysis of Ratios
by MaestriAS WE HAVE ALREADY DISCUSSED, THE INCOME statement by itself only hints at the cash-flow story. It offers no insight into where cash came from or how it was used, recording only two structural elements, revenue and expense, which track flows of value, not cash. The cash-flow statement integrates the income-statement data with the additional information provided by the balance sheets to get the full story. Note that balance sheets here is intentionally plural—double the fun. The cash-flow statement tracks the underlying cash events behind the balance sheets and income statement, whose accrual numbers present only an as though cash truth. The statement of cash flow offers actual cash truth. To prepare a cash-flow statement, you need three things: a starting balance sheet, an ending balance sheet and an income statement for the time in between. With these statements, you can adjust each major-value line item from the income statement by the change in its most closely associated balance-sheet items to determine what actually happened in cash terms. By such adjustments, you undo the misleading as though cash assumption built into accrual-based accounting systems. For example, let’s look at Jones Dynamite Co. for the second quarter of 2000, ending 6/30/00.
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