The Cash Flow Statement

Now we come to the cash and to the flow of cash. As described by Robert Higgins in his book, Analysis for Financial Management, ^[2] the cash flow statement is commonly thought of as the place to put down the sources of cash and uses of cash in the project. Viewed this way as a double entry system, the sources ought to balance the uses. Flow refers to a change over time. As such, a cash flow statement is not a statement of cash on hand, but rather the change in cash over the reporting period.

There are only two ways a company can generate cash: decrease an asset or increase a liability. Decreasing the accounts receivable asset account brings cash into the company that is recorded on the P&L as revenue; selling a building or a truck brings cash into a business. Taking cash out of a checking account brings cash into a company. This last example is often confusing. How can reducing the cash balance of a company's checking account be a source of cash for the company? Think of it this way: reducing the balance in the asset account puts cash in the hands of the company's management just as if you had cashed a check on your personal account at a bank. The cash value of the checking account is no more actual cash than the cash value of the truck.

Correspondingly, the only two uses of cash are to increase an asset or decrease a liability. Paying vendors reduces the accounts payable liability account, as does paying off a loan. Adding to the cash balance of a checking account or acquiring a capital asset, like a truck, increases assets and is a use of cash.

Table 5-2 shows an example of a cash flow statement presented as sources and uses. Another form of the cash flow statement arranges the items into three categories: cash from operations; cash from investments in property, plant, and equipment; and cash from financing activities like stock sales. Even so, the sum of the total uses must balance the sum of the total sources.