If you could view two statements to reconstruct cash flow, which two would you choose?

If you could view two statements to reconstruct cash flow, which two would you choose?

• A. Balance Sheet and Cash Flow Statement
• B. Income Statement and Cash Flow Statement
• C. Income Statement and Balance Sheet
• D. Income Statement and Statement of Changes in Equity

Answer: (C)

When you want to reconstruct cash flow from two statements, you rely on earnings and the changes in what the company owns and owes. The income statement gives net income, which is your starting point for cash from operations, but many items on that statement are non-cash (like depreciation) or tied to working capital. The balance sheet shows how working capital components (accounts receivable, inventory, accounts payable, accrued expenses, etc.) and long-term assets and liabilities changed over the period. By combining net income with the adjustments for non-cash charges and the year-to-year changes in balance sheet accounts, you can infer cash flow from operating activities and, with changes in long-term assets and financing items, estimate cash flows from investing and financing as well. So the pair of statements that best lets you reconstruct the cash flow is the income statement alongside the balance sheet. The other pairings don’t give you the full picture of cash movements from accrual earnings: a cash flow statement with another statement would be redundant, and the income statement with the balance sheet alone doesn’t directly translate all non-cash adjustments and working-capital changes into cash.

When you want to reconstruct cash flow from two statements, you rely on earnings and the changes in what the company owns and owes. The income statement gives net income, which is your starting point for cash from operations, but many items on that statement are non-cash (like depreciation) or tied to working capital. The balance sheet shows how working capital components (accounts receivable, inventory, accounts payable, accrued expenses, etc.) and long-term assets and liabilities changed over the period. By combining net income with the adjustments for non-cash charges and the year-to-year changes in balance sheet accounts, you can infer cash flow from operating activities and, with changes in long-term assets and financing items, estimate cash flows from investing and financing as well. So the pair of statements that best lets you reconstruct the cash flow is the income statement alongside the balance sheet.

The other pairings don’t give you the full picture of cash movements from accrual earnings: a cash flow statement with another statement would be redundant, and the income statement with the balance sheet alone doesn’t directly translate all non-cash adjustments and working-capital changes into cash.