7. The Statement of Cash Flows

Let's talk about the statement of cash flows. So right off the bat, we get two things. One, cash, two, flows. Well, what does that even mean? We know that everything represented on the statement of cash flows is gonna be cash. Simple enough. The next thing that we get is this word flows. Flows tells us that it is over a period of time. It's not just a point in time, it is the flow over an entire period of time. So how did the cash flow over this whole period? Okay, so let's look at the statement of cash flows. It's gonna be broken up into three sections, operating, investing, and financing, and you're gonna have pluses and minuses in each little group here.

You're going to have to be able to split them up amongst these three different groups. So let's talk about operating. Operating cash flows are gonna be day-to-day. So that means stuff like salaries, utilities, anything that you need on a day-to-day basis to operate your business, right? Words mean something. So if it's needed to operate your business, well, then it goes in the operating section. Next, we have investment or investing activities. We'll just call it investing. So that's gonna be stuff like purchase of land, let's say land, equipment, that kind of stuff. These are things that are long-term investments. So if it's an investment in your company, and that's purchase of something big that's gonna last a long time, it's not just gonna go to pay a salary or go to pay a gas bill or something that's just you pay for it and it's gone.

We're talking about things that last for a really long time. Typically, we think of long time in accounting as over a year. So that's gonna be your investing section. Now, financing section, that's how you finance your business. So this doesn't have to do with, obviously, operations or investment at all. This is more focused on your business rather than in your business. So we're talking here about long-term notes.

By that, I just mean loans, so let's just say loans. Long-term loans, stock issuance, could be dividends, that sort of thing. So anything you need to finance your business. So basically think about getting money for your business, not from customers 'cause that's selling your widgets. That's up here in operating. You day-to-day sell stuff, so if you have, let's say, cash from sales, that goes up here because that's a day-to-day operation. Now, if you get somebody to invest $100,000 into your business, that's down here 'cause that's financing your business. So on the statement of cash flows, you're gonna see these three different sections, and each one'll have an amount over here.

So it's all of these things added up, goes over here. All of these things added up, gets subtotaled over here. Same, all of these end up over here. And then at the bottom, you have net increase, hopefully, net increase, and I guess it could be a decrease if you had less cash, net increase in cash, and that's this guy plus this guy plus this guy, and let's just call it $1,000. So your net increase over the year from all of these things was $1,000. And let's say you had $500 at the beginning. So your beginning cash balance was $500.

So that means your end of the year cash balance is $1,500. EOY, just end of year. So the end of year cash balance was $1,500. So the statement of cash flows takes you from your beginning of the year balance to your end of the year balance by figuring out what the change, the delta, that's what this little triangle guy means, what the change over the year in cash was. And since we're looking for a change, and like I said, since it's the word flow, we know that it's a period of time. So if somebody says, "How much did your cash increase?" you would have to say, "Over what period of time?" So when asked, is the statement of cash flows a point in time or a period in time statement, well, it's a period because you need to know over what period of time am I trying to measure all of this change?