Which two statements would you use to construct a cash flow statement?

• A. Cash Flow Statement and Income Statement
• B. Income Statement and Cash Flow Statement
• C. Balance Sheet and Cash Flow Statement
• D. Income Statement and Balance Sheet

Answer: (D)

Constructing a cash flow statement relies on data that shows both the profitability and the changing financial position of the company. The income statement provides net income and non-cash expenses, while the balance sheet reveals changes in working capital and the balances of assets and liabilities that drive cash movement. In the common approach (the indirect method), you start with net income from the income statement and then adjust for non-cash items and for changes in balance sheet accounts to arrive at cash from operating activities. Because of that, you need information from both the income statement and the balance sheet to build the cash flow statement. Using the cash flow statement with another statement doesn’t supply the needed net income figure or the changes in working capital, and relying on just one of the other statements doesn’t give you the full picture of cash movements.