One of the financial statements that you need to be familiar with is the Statement of Cash Flows which records a company’s sources and uses of cash in three activity areas; Operating, Investing and Financing. Of these three, Operating Cash Flow is, for many people, the most difficult to understand and especially confusing is the section that shows sources and uses of cash generated by changes in Current Assets and Liabilities. In fact, some have referred to this section as “counter-intuitive”.

I suggest that one approach to making this part of OCF more easily understood is to use the following chart to answer potential exam questions relative to how changes in the current accounts impact OCF.

The most basic way you can use this chart is to first ask the following three questions of the input data to the exam question:

• What is the amount of the period-over-period change?
• Is it an increase or decrease?
• Is the account in question an Asset or Liability?

The results of this thought process can then be used to answer questions which require you to determine how a period-over-period change in a given current account will affect OCF. That is, will this change generate a Source or Use of cash.

Also, you could be asked to answer “higher thinking” questions where you have to evaluate what the impact of various business decisions will be on OCF. For example, a decision to increase credit terms to your customers will result in a USE of cash. Why, because an increase in credit terms will increase the Accounts Receivable balance which is an asset account and as the chart indicates, an increase in an asset generates a USE of cash.

I’d recommend putting the SOURCE/USE chart on a flash card and then apply it using the financial statements in the ETM.

- George Schilling, CTP