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Definition

Preparing the Statement of Cash Flows

Companies prepare the statement of cash flows differently from the three other basic financial statements. First, it is prepared from an adjusted trial balance. It requires detailed information concerning the changes in account balances that occurred between two points in time. An adjusted trial balance will not provide the necessary data. Second, the statement of cash flows deals with cash receipts and payments. As a result, the company must adjust the effects of the use of accrual accounting to determine cash flows.

The information to prepare this statement usually comes from three sources:

Comparative balance sheets: Information in the comparative balance sheets indicates the amount of the changes in assets, liabilities, and stockholders’ equities from the beginning to the end of the period.

Current income statement: Information in this statement helps determine the amount of cash provided or used by operations during the period.

Additional information: Such information includes transaction data that are needed to determine how cash was provided or used during the period.

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