The balance sheet is presented as follows:

Illustration 11: Balance sheet for Friends Company

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 total claims (liabilities and equity).

The statement of cash flows has the following format:

Illustration 12: Statement of cash flows for Friends Company

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 section explains 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