Users of financial statements are interested in the operating, investing, and financing activities of companies.

For a particular company they ask questions such as: What is the relationship between net income and cash provided by operations? Were the companys operations a source or a use of cash? What investments and growth activities took place? How were they financed? What were the proceeds received from issuing capital stock or debt and how were the funds used? Each of these questions relates to the cash flows of the company. The FASB recognized the importance of providing answers to these questions by stating that financial reporting should provide information about a companys: methods for obtaining and spending cash data on borrowing and repayment of debt capital transactions, including cash dividends and other distributions of resources to owners other factors that may affect its liquidity or solvency. 1 To satisfy these objectives, GAAP requires a company to present a statement of cash flows for the accounting period along with its income statement and balance sheet. 2 The statement of cash flows is an integral part of a companys financial statements and the subject of this chapter.

Example: Adjustments for Operating Cash Flows Smith Company made cash sales of $ 30,000 and credit sales of $ 42,000 during its first year of operations. Therefore, its Sales Revenue account has a credit balance of $ 72,000 at the end of the year. It also collected $ 37,000 of the $ 42,000 accounts re-ceivable during the year so that its Accounts Receivable account has a debit balance of $ 5,000 at the end of the year. That is, the Accounts Receivable balance increased from $ 0 to $ 5,000 from the beginning to the end of the year. As shown in the top part of Example 21.4, by subtracting the $ 5,000 increase in Accounts Receivable from the $ 72,000 Sales Revenue, Smith determines that it collected $ 67,000 from customers during the year. ( You can verify the $ 67,000 cash collections by adding the $ 30,000 cash sales to the $ 37,000 cash collected from accounts receivable.) Smith would include the $ 67,000 cash collected from customers in its cash inflows from operating activities. Now assume that Smith Company paid salaries of $ 13,000 during the year and that it accrued salaries of $ 1,000 at the end of the year. Therefore, its Salaries Expense account has a debit balance of $ 14,000 at the end of the year. Its Salaries Payable account has a credit balance of $ 1,000 at the end of the year. That is, the Salaries Pay-able account increased from $ 0 to $ 1,000 from the beginning to the end of the year. As shown in the bottom part of Example

21.4, by subtracting the $ 1,000 increase in Sal-aries Payable from the $ 14,000 Salaries Expense, Smith determines that it paid $ 13,000 to employees during the year. Smith would report the $ 13,000 cash paid to employees in its cash outflows for operating activities.