If you're operating under the accrual method of accounting, sales and expenses often appear on financial statements before payment is received or made. A cash flow statement converts financial data recorded on an accrual basis in the income statement and balance sheet to a cash basis. The statement shows sources of cash receipts, where cash is spent, and the net change. To arrive at the net change, the statement focuses on three areas of activity:
1. Operations. Operating activities are a company's dally internal activities that generate cash or require its expenditure. These include cash collections, operating expenses (such as payroll, rent, supplies and inventory) and income taxes.
2. Investing. This varies depending on your industry. For example, with manufacturers, investing generally involves the purchase or sale of equipment.
3. Financing. Loans and leases that provide or require cash generally fall under financing. Which are greater? Can you operate without any of the three?