If you bought a GPS, would you read the manual? I'm one of those that read the manual as a last resort. This article is kind of like the manual for the GPS. Unlike the GPS and most other stuff, the Cash Flow Statement as designed by the Accounting Profession is neither intuitive or easily understandable. The intent of this article is to present an example of a simplified version of the Cash Flow Statement.
Attempts by the accounting profession to standardize the Cash Flow Statement have resulted in often complicating the simple. For instance the standard format has three categories of cash flow: cash from operations, cash from investing and cash from financing. Without getting into great detail, cash from operation is largely reflected in the current assets, current liabilities and the income statement. Cash from investing is reflected in changes in the non-current assets. And, cash from financing is determined by looking at the non-current liabilities and equity accounts. My suggestion is not to worry about this classification, just follow the cash - money coming in and money going out.
We begin the Cash Flow Statement by identifying the beginning and ending balance of cash and also determining the net change in cash for the desired period. Looking our comparative Balance Sheet, we note that the balance at the beginning of the week for the main cash account, which is a checking account, is $25,700. The balance at the end of the week for that same account is $19,400. The difference between the beginning and ending balances is $6,300. The purpose of the Cash Flow statement is to explain "where did the money that makes up this net of $6.300 come from and where did the money go"
Step 1: Determine the amount of the change in the cash balance.

Step 2: Review the changes in the Balance Sheet balance that result from money coming in or money going out. One way to do this is to compare the ending and beginning balances from all the balance sheet accounts and then determine how much of the change is a result of cash coming in or cash going out. For Instance, suppose the beginning balance of Accounts Receivable is $65,430 and the ending balance is $72,355, a net increase of $6,925. However, review of the account reveals that there were credit sales of $93,425 and payments received from customers in the amount of $86,500. We are only interested in the cash impact on the account so we will reflect the $86,500 on the cash flow statement. The below accounts are typical sources and uses of cash.

Cash Flow Statement

Notice that the "Net Change in Cash" from our Cash Flow Statement matches the change in the Cash balance from the beginning of our period to the end of our period. The Income Statement generally does not have much relevance to the Direct Method of preparing the Cash Flow Statement. However, there could be some transactions that use cash that some companies may not record as a payable on the balance sheet. Suppose a phone bill is received and is paid without being entered into Accounts Payable. The Cash account is decreased and the telephone expense is increased. No other Balance Sheet account is impacted. In this instance, it would be appropriate to consider the Income Statement transaction in our Cash Flow Statement.. The Cash Flow Statement does NOT have to be more complex that the one above for most businesses. My suggestion is not to worry whether a cash transaction should be categorized as an Operations, Investment or Financing transaction. Focus instead on explaining the change in the cash balance in terms of "where did the money come from." and "where did the money go.
The Cash Flow Statement has wonderful application as a forecasting tool. By adding a few more columns, you can then anticipate future cash flow surpluses and shortages and take the appropriate steps to prepare properly.