Start with the Balance Sheet Equation:

(1)  Assets = Liabilities + Owners Equity
 

Rewrite equation (1) as follows:
(2) Cash + Other assets (not cash) = Liabilities + Owners Equity

Rewrite equation (2) as follows

(3) Cash = Liabilities + Owners Equity - Other Assets (not cash)
 

Rewrite equation (3) as follows:

(4)  Cash =   Liabilities +   Owners Equity -  Other Assets (not cash)

A change in the cash account must be explanable (or balanced by) the changes in the liability, owner equity and other asset accounts.

Potential Sources of Cash:

1. From Operations**
2. From a Decrease in a noncash asset
3. From an Increase in a liability
4. From an increase in Owners equity other than (1) above.

Potential Applications (uses) of Cash:

1. For Operations **
2. From an Increase in a noncash asset
3. From a Decrease in a liability
4. From a Decrease in Owners equity other than (1) above.

**Note: On any given cash flow statement, there will be only a net source or a net use of cash for operations.  Some operational activities generate cash and others use cash, but they should be netted on the statement as a net source or a net use.

Methods for Developing a Cash Flow Statement

1. Comparative Balance Sheet approach
2. Worksheet approach
3. "T" Account approach –preferred method

"T" account approach:

1. Prepare a "T" account for all accounts in the balance sheet--the cash "T" account will need to be larger that all of the others.
2. Enter the net change for the period in each account as a debit or credit, as appropriate
3. Draw a line under each amount entered ina "T" account
4. Determine that the total debit entries to the accounts equal the credit entries.
5. Analyze the transactions and enter their affects into the "T" accounts in debit/credit format
6. When finished, the total of entries below the line should be equal to the net change above the line.
7. The Cash "T" account will now contain all of the information needed to prepare the cash flow statement.
 

Cash Flow Statement Sections:

1. Operating
2. Investing
3. Financing

Format 
Statement of cash flows may be prepared using the direct or indirect method

Direct method: 

Enterprises  report major classes of gross cash receipts and gross cash payments and their arithmetic sum—the net cash flow from operating activities (the direct method).  Enterprises that do so should, at a minimum, separately report the following classes of operating cash receipts and payments:

a. Cash collected from customers, including lessees, licensees, and the like
b. Interest and dividends received
c. Other operating cash receipts, if any
d. Cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising, and the like
e. Interest paid
f. Income taxes paid
g. Other operating cash payments, if any.

Indirect method:

Reporting the same amount for net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities (the indirect or reconciliation method).  That requires adjusting net income to remove (a) the effects of all deferrals of past operating cash receipts and payments, such as changes during the period in inventory, deferred income, and the like, and all accruals of expected future operating cash receipts and payments, such as changes during the period in receivables and payables,12 and (b) the effects of all items whose cash effects are investing or financing cash flows, such as depreciation, amortization of goodwill, and gains or losses on sales of property, plant, and equipment and discontinued operations (which relate to investing activities), and gains or losses on extinguishment of debt (which is a financing activity).

Other Considerations

If the indirect method is used, amounts of interest paid (net of amounts capitalized) and income taxes paid during the period shall be provided in related disclosures.

If the direct method of reporting net cash flow from operating activities is used, the reconciliation of net income to net cash flow from operating activities shall be provided in a separate schedule.  If the indirect method is used, the reconciliation may be either reported within the statement of cash flows or provided in a separate schedule, with the statement of cash flows reporting only the net cash flow from operating activities.  If the reconciliation is presented in the statement of cash flows, all adjustments to net income to determine net cash flow from operating activities shall be clearly identified as reconciling items.

Information about Noncash Investing and Financing Activities

(FASB No. 95, para 32.) Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period shall be reported in related disclosures.  Those disclosures may be either narrative or summarized in a schedule, and they shall clearly relate the cash and noncash aspects of transactions involving similar items.  Examples of noncash investing and financing transactions are converting debt to equity; acquiring assets by assuming directly related liabilities, such as purchasing a building by incurring a mortgage to the seller; obtaining an asset by entering into a capital lease; and exchanging noncash assets or liabilities for other noncash assets or liabilities.  Some transactions are part cash and part noncash; only the cash portion shall be reported in the statement of cash flows.