IV. Cash Flow Statement

This statement explains why the cash has changed. Many people include marketable securities in cash because they are almost as easy to liquidate as taking cash from a bank account.

1. Change in Cash = Change in all other assets and liabilities
2. Change in Cash = Change in assets /- Change in Liabilities
3. Change in Cash = Change in Assets /- Change in Outsiders’ Liabilities  /- Change in Owners’ Equity
4. Change in Cash = Change in Assets /- Change in Outsiders’ Liabilities /- Change in Share Capital /- Change in Retained Earnings

Each level of bifurcation provides a little more detail. 

By regrouping together Outsiders’ Liabilities and changes in the equity share capital itself, we can think of three classifications :

5. Change in Cash = Change in Assets /- (Change in Outsiders’ Liabilities /- Change is Share Capital) /- Change in Retained Earnings

The terminology used to denote each of the grouping in this equation is :

Change in Cash =            Investment activities (change in assets)

            financing activities (change in outsiders’ liabilities and share capital)

            Operations (change in retained earnings)

Of course, each of these terms can then be subdivided.

Usually, the presentation tries to reconcile the funds from operations with the change in cash position.

Since different people are comfortable with different presentations, and since different presentations often highlight or hide a different aspect of the financial situation, it is often useful for an analyst to rearrange the presentation to the form he is most comfortable with, and then to present it as he would like to illustrate the point he would like to make.

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