Statement of Cash Flow as per US GAAP

## What is a Statement of Cash Flow?

A Statement of Cash Flow shows how changes in balance sheet accounts and income affect cash and cash equivalents. It breaks down the analysis into operating, investing, and financing activities. Under US GAAP (Generally Accepted Accounting Principles), companies must prepare this statement as part of their financial reporting.

## Purpose and Importance

- Shows how a company generates and uses its cash

- Helps assess company's ability to pay bills and dividends

- Indicates company's ability to generate future cash flows

- Provides insight into company's liquidity and financial flexibility

## Three Main Sections

### 1. Operating Activities

This section shows cash flows from main business operations.

Key Components:

- Cash received from customers

- Cash paid to suppliers

- Cash paid for operating expenses

- Interest paid

- Income taxes paid

### 2. Investing Activities

Shows cash flows from buying and selling long-term assets.

Key Components:

- Purchase of property, plant, and equipment

- Sale of property, plant, and equipment

- Purchase or sale of investments

- Loans made to others

- Collections of loans

### 3. Financing Activities

Shows cash flows from external funding sources.

Key Components:

- Issuing or repurchasing stock

- Paying dividends

- Borrowing or repaying loans

- Issuing bonds

## Methods of Preparation

### 1. Direct Method

- Lists actual cash receipts and payments

- Shows operating cash flows directly

- Easier to understand

- Requires more detailed information

### 2. Indirect Method

- Starts with net income

- Adjusts for non-cash items

- Most commonly used method

- Reconciles accrual accounting to cash basis

## Important Rules Under US GAAP

- Must classify activities into operating, investing, and financing

- Non-cash transactions should be disclosed separately

- Must reconcile beginning and ending cash balances

- Interest and dividends have specific classification requirements

## Common Non-cash Items

- Depreciation and amortization

- Stock-based compensation

- Changes in accounts receivable

- Changes in inventory

- Changes in accounts payable

## Practical Example

Starting Cash Balance: $100,000

Operating Activities:

- Net Income: $50,000

- Depreciation: +$10,000

- Increase in Accounts Receivable: -$5,000

Net Cash from Operations: $55,000

Investing Activities:

- Purchase of Equipment: -$20,000

Net Cash from Investing: -$20,000

Financing Activities:

- Loan Payment: -$15,000

Net Cash from Financing: -$15,000

Ending Cash Balance: $120,000

## Benefits of Understanding Cash Flow Statement

- Better business decision making

- Improved cash management

- Enhanced financial planning

- Better understanding of company's financial health

- Ability to spot potential cash flow problems early

This completes the basic understanding of Statement of Cash Flow as per US GAAP. Remember, practice with real examples will help better understand these concepts.