Preparing the Cash Flow Statement

The cash flow statement explains how cash moves in and out of a business during a specific period. It includes operating, financing, and investing activities.

For example, Marvel Bakery reports a net income of one hundred thousand dollars. Depreciation on the oven, a non-cash expense, is twenty thousand dollars.

The business also increases its inventory by ten thousand dollars and purchases a new oven for thirty thousand dollars.

In the cash flow statement, depreciation of twenty thousand dollars is added to the net income, and the inventory increase of ten thousand dollars is subtracted. As a result, the cash flow from operating activities is one hundred ten thousand dollars.

The oven purchase is recorded under investing activities as an outflow of thirty thousand dollars. There are no financing activities during this period.

The total cash flow is an increase of eighty thousand dollars, showing the actual cash generated during the period.

This statement helps evaluate the company’s ability to generate cash, manage expenses, and fund future operations.