Question

How does a balance sheet relate to a cash flow statement?

Answer 1

The balance sheet gives the values of assets and liabilities of a firm as on a specified date. The previous year's figures are also given in an adjacent column, which can help in ascertaining the changes in the values of each item of assets and liabilities, between the two dates; the changes in cash balance including.

When the balance sheet is based on an accrual basis, the changes in the values of assets and liabilities are not entirely due to cash outflows/inflows, as they would include the assets and liabilities created by following the accrual and matching concept. Hence, it is not possible to know the changes in assets and liabilities that have occurred due to cash inflows or outflows alone.

The cash flow statement seeks to provide the details of cash inflows and cash outflows that occurred during the period in a summarized form. The net cash inflow/cash outflow is then reconciled with the beginning and ending balances of cash. As such the cash flow statement can be considered as a supplementary statement to the balance sheet that explains, in a summarized manner, how much of the changes in assets and liabilities has occurred due to cash flows and the nature of those cash flows; that is whether they are from operations or from investing or from financing.