This example continues the topic from pages 266-268 (Is the statement of cash flows enough on its own?) in Chapter 6.

Example: Bunns the Bakers’ Statement of Cash Flows as an Explanation of Changes in the Statement of Financial Position

Cash flowing into and out of an entity will change the assets, liabilities and equity on the statement of financial position in the following ways:

• Buying a new non-current asset will increase non-current assets but decrease cash
• Selling a non-current asset will decrease non-current assets but increase cash
• Taking out a new loan will increase cash and increase liabilities while repaying part or all of a loan will decrease liabilities and decrease cash
• Paying a trade payable will reduce trade payables and reduce cash
• Receiving payment from a trade receivable will increase cash but decrease trade receivables
• Buying inventory will increase inventory and reduce cash while selling more inventory will reduce inventory and increase cash
• Issuing new shares for cash will increase share capital and increase cash

These changes in assets, liabilities and equity from the end of one year to the next will all be reflected in the statement of cash flows under cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. To help you picture this, the statement of financial position of Bunns the Bakers (Figure 2.1) is reproduced in this PDF with notes to show the headings under which changes in assets, liabilities and equity are reflected in the statement of cash flows.