What you will learn to do: Define cash flows and the purpose of the Statement of Cash Flows
Prior to the adoption of FASB statement 95 in 1988, a full set of financial statements included a statement of changes in financial position. Now, instead of the statement of changes in financial position, GAAP requires a statement of cash flows.
A statement of cash flows classify cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category.
The FASB statement encourages enterprises to report cash flows from operating activities directly by showing major classes of operating cash receipts and payments (the direct method).
Enterprises that choose not to show operating cash receipts and payments are required to report the same amount of net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities (the indirect or reconciliation method) by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items included in net income that do not affect operating cash receipts and payments. If the direct method is used, a reconciliation of net income and net cash flow from operating activities is required to be provided in a separate schedule, as well as information about investing and financing activities not resulting in cash receipts or payments, such as buying a vehicle using a loan.