Chapter 12
Using Accounting Information
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that must be recorded in one period, but may take place in another period. Company bills may not
get paid for several months. Prepaid expenses can be left unadjusted for a number of periods. A
borrower may default on a loan. Depreciation is recorded in the books, but there is no exchange
of cash. Because of the way these transactions are accounted for on the balance sheet and income
statement, it can be difficult to know where the cash is actually going within the business. As a
result, the accounting profession created another financial statement whose purpose is to specifically
indicate both the sources of cash and the uses of cash within an organization. This document is
known as the cash flow statement.
The
cash flow statement
shows how net income is converted to cash, basically where the cash
came from and how cash was used during the financial period. Remember, net income does not
necessarily translate into cash in the bank.The way a business is structured—in terms of financing,
debt collection, etc.—can have a significant impact on the way net income is turned into cash.
It is this aspect of a business that the cash flow statement reveals to users or readers, who may
include management, accountants, potential lenders and investment analysts. Although cash flow
statements can be of significant help to these financial players, their preparation is also required
under ASPE and IFRS. In other words, cash flow statements are not only useful but also necessary.
Knowing what they are and understanding what they present are essential tasks for an accountant.
The cash flow statement for Second Cup is presented in Figure 12.23. Cash inflows are shown as
positive numbers and cash outflows are shown in parentheses. Rather than showing how to prepare
this statement, this section will explain the three sources and uses of cash in a business in order to
further analyze a company’s financial information.
