Question

How would the numbers in a common sized balance sheet for the years 2018 and 2017, relate to the 2018 Cash Flow statement of the same company.

Answer 1

The numbers in the statement of cash flows are derived from the changes in a business’s balance sheet accounts during the year. Changes in the balance sheet accounts drive the amounts reported in the statement of cash flows.The lines of connection between changes in the business’s balance sheet accounts during the year and the information reported in the statement of cash flows.

Balance sheet account changes are the basic building blocks for preparing a statement of cash flows. These changes in assets, liabilities, and owners’ equity accounts are the amounts reported in the statement of cash flows, or the changes are used to determine the cash flow amounts (as in the case of the change in retained earnings, which is separated into its net income component and its dividends component).

In the cash flow from operating activities section in the figure that net income is listed first, then several adjustments are made to net income to determine the amount of cash flow from operating activities. The assets and liabilities included in this section are those that are part and parcel of the profit-making activity of a business.The rules for cash flow adjustments to net income are:

• An asset increase during the period decreases cash flow from profit

• A liability decrease during the period decreases cash flow from profit

• An asset decrease during the period increases cash flow from profit

• A liability increase during the period increases cash flow from profit