This is a brief overview to introduce accountants and non-accountants to reading and understanding financial statements. We've been introduced to the Income Statement and Balance Sheet in a previous article, Understanding Income Statements and Balance Sheets for Non-Accountants. This article addresses the Cash Flow Statement sometimes referred to as the Statement of Cash Flows.

As its name suggests, this financial statement shows the uses and sources of cash. There are two types of methods for reporting cash flows. They are the indirect method and direct method. We're going to talk about the indirect method since that is the method used by most companies. There has been talk by the accounting standard setters to require use of the direct method only, but there has been strong opposition to this since it requires data collection that is not normally done in the course of business and would require substantial IT and business flow changes and costs for what preparers believe would be minimal if any increased benefit to financial statement users.

You don't really need to worry about whether you're looking at a cash flow statement prepared using the indirect or direct method, but for those of you who like to know these things, the indirect method is named as such because the cash flow statement starts with net income (or loss) and reconciles its way to show the changes in cash.

According to Generally Accepted Accounting Principles (GAAP), there are three main sections to the Cash Flow Statement. The first starts with net income, and adds back non-cash expenses/losses, and subtracts non-cash gains. Next, changes in balance sheet categories are added or subtracted depending on whether they provided or used cash in the period. The subtotal of this section is the amount of cash provided or used in operating activities.

The next section shows the cash activities for investing activities such as purchase of fixed assets, making and collecting loans, and purchases of investments, and proceeds from sales of investments. The subtotal of this section is the amount of cash provided or used in investing activities.

The next section shows the uses and sources of cash for financing activities such as issuance of common stock and repurchase of common stock. The subtotal of this section is the amount of cash provided or used in financing activities.

The total of all of these sections is the net increase or decrease in cash during the period. This total is added to cash at the beginning of the period to arrive at the cash balance at the end of the period.

The cash balance at the end of the period is the same amount as shown on the balance sheet for cash. Now you can see details behind that one amount on the balance sheet.

There are also some required disclosures or footnotes to the cash flow statement. Frequently you will see the amount of cash paid for income taxes, and the cash paid for interest (e.g. on debt). Other common disclosures include information on investing and financing activities that affected assets or liabilities but did not result in cash receipts or cash payments in the period.

Now take a look at your own company's cash flow statement or the cash flow statement of a company in which you own shares. Congratulations! You've got the basic concepts of how to read a statement of cash flows, and to understand the sources and uses of the company's cash.