FIN 300 – Chapter 3: Working With Financial Statements
3.1 Cash Flow and Financial Statements: A Closer Look
Firms do two different things: (1) generate cash and (2) spend it.
o Cash generated from selling a product, an asset, or a security.
Selling a security involves either borrowing or selling an equity interest.
o Cash is spent by paying for materials and labour to produce a product and by purchasing
assets. Paying to creditors and owners require spending cash.
Sources and Uses of Cash
Sources of Cash – A firm’s activities that generate cash.
Uses (or Applications) of Cash – A firm’s activities in which cash is spent.
An increase on the left-hand side (asset) or a decrease on the right-hand side (liability or equity)
account is a use of cash.
A decrease in the asset account or an increase in the liability or equity account is a source of cash.
Net addition to cash is just the difference between sources and uses of cash.
Statement of Cash Flows
Statement of Cash Flows – A firm’s financial statement that summarizes its sources and uses of
cash over a specified period.
o Group all of the changes into three categories: operating activities, financing activities,
and investment activities.
Additional Information in Chapter
Common-Size Statement – A standardized financial statement presenting all items in percentage
terms. Balance sheets are shown as a percentage of assets and income statements as a percentage
Common-Base-Year Statement – A standardized financial statement presenting all items relative
to a certain base yea