The Conceptual Framework Underlying the Preparation of the Statement of Cash Flow

The objective of the statement of cash flow is to facilitate an understanding of the financial consequences of business activities by providing detail pertaining to the sources and uses of a company’s cash. While the income statement and balance sheet are based on accrual accounting, the statement of cash flow is intended to represent the cash-flow consequences of business activities. Most of the challenge with preparing and ultimately understanding, the statement of cash flow is due to a failure to appreciate the relation between the statement of cash flow and other financial statements. The purpose of this note is to discuss the conceptual framework underlying the preparation of the statement of cash flow that is based on that relation.