Introduction

This chapter examines the purpose and format of the statement of cash flows and illustrates how the statement is prepared. In this chapter, we focus on on the two methods – direct and indirect – used to prepare the operation section of the statement of cash flows. We then briefly explore the investing and financing sections of the statement of cash flows before concluding with an analysis of how to use the statement of cash flows to evaluate a business and its cash.

Chapter outline

After reading this chapter, you should be able to:

1. Describe the purpose and format of the statement of cash flows
2. Describe the process of preparing the statement of cash flows
3. Prepare the operating activities section of the statement of cash flows using the direct method
4. Prepare the operating activities section of the statement of cash flows using the indirect method
5. Prepare the investing and financing activities sections of the statement of cash flows
6. Bring it all together into a complete statement of cash flows