There is a close interrelationship between cash flow statement and other financial statements, especially balance sheet and income statement. The cash flow statement assists in explaining cash movement within the organization, and it helps in determining the amount of cash a company has at hand, which is always recorded on the balance sheet (Loughran, 2016). The income statement, on the other hand, is used to record assets and liabilities within a given period of time (Loughran, 2016). Each of the three financial statements only gives a portion of the financial status of a company. However, they show the complete financial conditions of the company when they are used together. Therefore, cash flow statement is interrelated to balance sheet and income statement.
Operating activity is a section of cash statement of cash flow that includes cash activities associated with net income like cash payment and cash receipts. Investing activities, on the other hand, is a portion of the statement of cash flow that involves cash activities that are related to non-recurrent assets such as property, equipment, and long-term investment. Lastly, financing activity includes cash activities that are linked to the non-current liabilities and capital. Hence, operating activities, investing activities, and financing activities are all sections of the statement of cash flow (Loughran, 2016).
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There are two ways in which financial experts can prepare cash flow statement by including direct and indirect methods. The main difference is that direct method includes a number of lines like cash from clients and amount paid by suppliers while indirect income shows net revenue accompanied by the alterations required to change the total net income to the volume of cash from management activities. The direct method is the GAAP because it also provides the reconciliation of net income to the cash given (Thacker, 2014).
Loughran, M. (2016). The Three Types of Financial Statements . Retrieved from https://www.thoughtco.com/the-three-types-of-financial-statements-192716
Thacker, S. (2014). Understanding the Different Types of Financial Statements . Retrieved from https://www.allbusiness.com/understanding-the-different-types-of-financial-statements- 11381737-1.html