 The statement of cash flows (‫ )بيان التدفقات النقدية‬reports

the cash generated and used during the time interval

specified in its heading.
 used in the following categories:
◦ Operating activities – converts the items reported
on the income statement from the accrual basis of
accounting to cash.
◦ Investing activities – reports the purchase and
sale of long-term investments and property, plant and
equipment.
◦ Financing activities – reports the issuance and
repurchase of the company's own bonds and stock and the
payment of dividends.
◦ Supplemental information – reports the
exchange of significant items that did not involve cash and
reports the amount of income taxes paid and interest paid.
 Because the income statement is prepared
under the accrual basis of accounting, the
revenues reported may not have been
collected. Similarly, the expenses reported on
the income statement might not have been
paid.
◦ You could review the balance sheet changes to
determine the facts, but the cash flow statement
already has integrated all that information.
 The cash from operating activities is compared to the
company's net income.
◦ If the cash from operating activities is consistently greater than
the net income, the company's net income or earnings are said to
be of a "high quality".
◦ If the cash from operating activities is less than net income, a red
flag is raised as to why the reported net income is not turning into
cash.
 Some investors believe that "cash is king". The cash flow
statement identifies the cash that is flowing in and out of
the company.
◦ If a company is consistently generating more cash than it is using,
the company will be able to increase its dividend, buy back some
of its stock, reduce debt, or acquire another company. All of these
are perceived to be good for stockholder value.
 Some financial models are based upon cash flow.
When you use cash to buy a book, you now own the book (you've
increased your "assets") but you also have less money (you've
decreased your cash).
 When an asset (other than cash) increases, the Cash
account decreases.
 When an asset (other than cash) decreases, the Cash
account increases.
 When a liability increases, the Cash account increases.
 When a liability decreases, the Cash account decreases.
 When owner's equity increases, the Cash account increases.
 When owner's equity decreases, the Cash account decreases.

Here’s a Tip
 For a change in assets (other than cash)—the change in the Cash
account is in the opposite direction.