Lesson 1 of 6 · 12 min
How the cash flow statement links to the other statements
The cash flow statement explains, activity by activity, how cash moved from one balance sheet to the next, while the income statement explains the same period on an accrual basis; the gaps between the two show up as changes in working capital accounts.
In short
- The balance sheet is a snapshot at a point in time (stock accounts); the income statement, cash flow statement and statement of shareholders' equity cover the period between two snapshots (flow statements).
- The cash flow statement reconciles beginning to ending cash (including cash equivalents and restricted cash): beginning cash + operating + investing + financing cash flows = ending cash.
- Retained earnings link the income statement to equity: beginning retained earnings + net income − dividends = ending retained earnings.
- Accrual accounting records revenue and expenses when earned or incurred; when cash moves at a different time, a current asset or current liability changes (receivables, payables, prepaid expenses, deferred revenue).
- Reading all three statements together helps judge financial health and spot problems, such as reported sales that never turn into cash.
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