Final answer:
The first step in preparing the statement of cash flows entails using information from the comparative balance sheets and the income statement to understand changes in assets, liabilities, and equity, as well as the revenue earned and expenses incurred.
Step-by-step explanation:
The first step in the preparation of the statement of cash flows requires the use of information included in comparative balance sheets and the income statement, along with additional information. Here's why:
- Comparative balance sheets provide details on the changes in assets, liabilities, and equity over the period. These changes will inform the cash flow from investing and financing activities.
- The income statement provides details on the company's earnings, which are the starting point for calculating cash flow from operating activities. It shows the revenue earned and the expenses incurred during the period.
To prepare the cash flows from operating activities using the indirect method, for example, the net income from the income statement is adjusted for changes in working capital accounts (such as accounts receivable, inventory, and accounts payable) and for non-cash expenses (like depreciation) that are included in the income statement.