Introduction to Accounting
9.3. Presentation of the balance sheet
The balance sheet is presented as follows:
Illustration 11: Balance sheet for Friends Company
Friends
Company |
|
Assets |
$8,500 |
Total Assets |
8,500 |
|
|
Liabilities |
2,000 |
Equity |
|
Contributed Capital |
5,000 |
Retained Earnings |
1,500 |
Total Equity |
6,500 |
|
|
Total Liability and Equity (Claims) |
8,500 |
The balance sheet lists assets and corresponding claims (liabilities and equity). Any asset has a source, so assets balance with claims. That is why total assets equal the sum of total liabilities and equity.
9.4. Presentation of the statement of cash flows
The statement of cash flows has the following format:
Illustration 12: Statement of cash flows for Friends Company
Friends
Company |
|
Cash Flows from Operating Activities |
|
Cash Receipts from Customers |
$3,000 |
Cash Payments for Expenses |
(1,000) |
Net Cash Flow from Operating Activities |
2,000 |
|
|
Cash Flows from Investing Activities |
0 |
|
|
Cash Flows from Financing Activities |
|
Cash Receipts from Borrowing |
2,000 |
Cash Receipts from Capital Acquisitions |
5,000 |
Cash Payments for Distributions |
(500) |
Net Cash Flow from Financing Activities |
6,500 |
|
|
Net Increase in Cash |
8,500 |
Plus: Beginning Cash Balance |
0 |
|
|
Ending Cash Balance |
$8,500 |
The statement of cash flows explains how the company obtained and used cash during a period. Sources of cash are called cash inflows, and uses of cash are known as cash outflows.
Cash inflows are sources of cash; for example, payments from customers, capital acquisitions, etc.
Cash outflows are uses of cash; for example, payments to vendors, paying off bank loans, etc.
The statement classifies cash inflows and outflows into three categories:
- Operating activities explain cash generated through revenue and cash spent for expenses.
- Investing activities include cash received or spent on productive assets and investments in the debt or equity of other companies.
- Financing activities describe cash transactions associated with resource providers (i.e., owners and lenders.)
Illustration 13: Cash flow categories
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