The statement of cash flows basically reconciles the beginning and ending balances of which other permanent...

The statement of cash flows basically reconciles the beginning and ending balances of which other permanent financial statement? Can you explain how this works exactly?

Expert Solution

The three financial statements are all linked and dependent on each other.The income statement is not prepared on a cash basis-that means accounting principles such as revenue recognition,matching and accruals can make the income statement very different from the cash flow statement.If a company prepared it's income statement entirely on cash basis.It would have no balance sheet other than shareholders equity and cash. It's the creation of balance sheet through accounting principles that leads to the rise of the cash flow statements.

1)Net income from the bottom of the income statement links to the balance sheet and cash flow statement. On the balance sheet it feeds into retained earnings and on the cash flow statement it is the starting point for the cash from operating section.

2) Depreciation is added back and capital expenditure is deduced on the cash flow statement which determine Property Plant and Equipments.

3) Financing activities mostly affect the balance sheet and cash from finalizing except for interest which is shown in the income statement.

4)The sum of the last period's closing cash plus this period's cash from operating, investing and financing is the closing cash balance on the balance sheet

ekkarill92 answered 2 years ago

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