The statement of cash flows is customarily reported in three sections: operating activities, investing activities, and financing activities. The cash flow from operating activity section includes transactions that enter into the determination of net income. The net cash flow from operating activities will normally differ from the amount of net income for a given period of time. The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively long-term or permanent-type assets. The cash flows from financing activities section reports the cash transactions related to cash investments by the owner and borrowing and cash withdrawals of the owner. The net cash flow from financing activities is determined by subtracting the cash withdrawals from the cash received from the owner as an investment.
If you were preparing financial statements for a corporation, several categories that would have to be dealt with are stockholders’ equity, retained earnings, and dividends to owners. The only basic difference between a sole proprietorship and a corporation’s balance sheet occurs in the owner’s equity section. In the corporation balance sheet, this section is referred to as the stockholder’s equity section. In this section, the investment of the stockholders and the net income retained in the business are reported separately, and the names of the stockholders are not shown.