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Sunday, August 9, 2009

The Cash Flow Statement

The Cash Flow Statement compares net income to change in cash. It is greatly related to the transactions of cash. Generally there are two methods i.e. the direct method and indirect method. Indirect method is easier than the direct method. But we have to practice in both methods. Here both of the methods require a reconciliation between net income and net changes in cash. In this requirement, net income is at the top of the page and cash is at the bottom. All those things that account for the difference between the two amounts are listed in between.
Depreciation is an expense that reduces net income. However, no cash actually goes out of the bank account when it is recorded. Therefore it has to be added back to net income as part of the process of reconciling it to cash.

In cash flow statement, there are three categories. They are Operating Activities, Financing Activities and Investment Activities.

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