As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills.
[4] The cash flow statement differs from the balance sheet and income statement in that it excludes non-cash transactions required by accrual basis accounting, such as depreciation, deferred income taxes, write-offs on bad debts and sales on credit where receivables have not yet been collected.
In 1863, the Dowlais Iron Company had recovered from a business slump, but had no cash to invest for a new blast furnace, despite having made a profit.
To explain why there were no funds to invest, the manager made a new financial statement that was called a comparison balance sheet, which showed that the company was holding too much inventory.
[10] In the United States in 1973, the Financial Accounting Standards Board (FASB) defined rules that made it mandatory under Generally Accepted Accounting Principles (US GAAP) to report sources and uses of funds, but the definition of "funds" was not clear.
Operating cash flows include:[15][3] Items which are added back to (or subtracted from, as appropriate) net income (which is found on the Income Statement) to arrive at cash flows from operations generally include:[citation needed] Examples of investing activities are:[16] Financing activities include inflows and outflows of cash between investors and the company, such as:[17] Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the financial statements.
Under US General Accepted Accounting Principles (GAAP), non-cash activities may be disclosed in a footnote or within the cash flow statement itself.
Non-cash financing activities may include:[15] The direct method of preparing a cash flow statement results in a more easily understood report.
This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.
[21] The following rules can be followed to calculate Cash Flows from Operating Activities when given only a two-year comparative balance sheet and the Net Income figure.