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The Corporate Finance Institute Accounting
Statement of Cash Flows
The Statement of Cash Flows is one of the key financial statements that
To learn more, please report the cash generated and spent during a specific period of time.
check out our free online Therefore, similar to the income statement, these statements cover a
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certain period, i.e. for the year ended December 31, 2017. The statement
of cash flows is divided into three main sections:
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• Operating Section: The principal revenue-generating activities of an
organization and other activities that are not investing or financing;
any cash flows from current assets and current liabilities
• Investing Section: Any cash flows from the acquisition and disposal
of long-term assets and other investments not included in cash
equivalents
• Financing Section: Any cash flows that result in changes in the size
and composition of the contributed equity and borrowings of the
entity (i.e. bonds, stock, cash dividends)
How to Prepare a Statement of Cash Flows
The operating section of the statement of cash flows can be shown
either through the direct method or the indirect method. For either
method, the investing and financing sections are identical and the only
difference is in the operating section. The direct method is a method
that shows the major classes of gross cash receipts and gross cash
payments. The indirect method, on the other hand, starts with net
income and adjusts the profit/loss by the effects of the transactions.
In the end, cash flows from the operating section will give the same
result whether under the direct or indirect approach, however, the
presentation will differ. The International Accounting Standards Board
(IASB) favors the direct method of reporting, because it provides more
useful information that the indirect method. However, it is believed that
greater than 90% of companies use the indirect method.
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