We will start to put together a statement of cash flows using the indirect method. We have constructed a worksheet from a comparative balance sheet showing balance sheet accounts for the current period, the prior period and the difference or change between the two. Our next step is to allocate these changes in balance sheet account from the worksheet to the statement of cash flows, finding the correct section of either operating activities, investing activities, or financing activities. The starting point is often the most confusing. The end result of our cash flow statement is basically the change in cash. We start the cash flows from operations section with net income but we would like to think about net income as a change in balance sheet accounts. Net income will be part of the change in retained earnings.
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