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Chapter 12 How Is the Statement of Cash Flows Prepared and Used?

John Huston, CEO and founder of Home Store, Inc., has reviewed the company’s income statement and balance sheet for the most recent fiscal year ended December 31, 2012. Home Store has grown rapidly this past year, with sales and net income showing significant gains compared to 2011. Although John is satisfied with the increase in profitability, he notices a significant decline in cash. John decides to pursue this with Linda Nash (CFO) and Steve Bauer (treasurer) in their weekly meeting:

John: I just received the income statement and balance sheet for 2012. Profits look great, but our cash position seems to have deteriorated. We had $130,000 in cash to start the year and ended with only $32,000. I noticed cash was declining throughout the year when I reviewed our monthly financial statements, but I’m concerned about how far our cash balance has dropped.
Steve: You’re right, John. We encountered cash flow problems several times throughout the year in spite of increased sales and profits. On several occasions, I had to delay payments to creditors because of cash flow issues.
John: Seems to me we shouldn’t have this problem. Where is our cash going?
Linda: Good question. Let me round up our cash flow information for the year. I’ll have something for you by next week.
John: Great! I’d like to start next week’s meeting by discussing how much cash we generated in 2012 from our daily operations. I realize net income is shown on an accrual basis, but I’d like to know how much net income was received in the form of cash.
Linda: No problem. I’ll have it for you next week.

Home Store, Inc., has cash flow problems that are common to many fast growing companies. Although the income statement and balance sheet provide important information concerning financial performance and financial condition, neither statement provides information regarding cash activity for a period of time. The focus of this chapter is on preparing a statement that provides cash flow information. This statement is appropriately called the statement of cash flows.