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Understanding Cash Transactions: Source vs. Use in Financial Analysis

In this lecture by Professor John N. Rallis II, CPA, at Valencia Community College, we explore the vital concept of cash transactions in accounting. We learn how to differentiate between source transactions and use transactions by analyzing the impact on cash balances. When assets increase, it’s a use transaction, indicating cash expenditure on new assets. Conversely, a decrease signifies a source transaction, as it reflects cash inflow from asset sales. Understanding this logic helps clarify the opposite effects of liabilities and equity transactions on cash flow.

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Understanding Cash Transactions: Source vs. Use in Financial Analysis

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  1. Source vs. Use Transactions ACG 2021 Spring 2004 Prof. John N. Rallis II, CPA Valencia Community College

  2. Why do we care? • We are trying to isolate a transaction’s effect ON CASH balances. • Cash includes currency (of course), checking accounts, etc. Is not literally “cash” as in bills and coins.

  3. Analyze this! MEMORIZE…

  4. What Does It Mean? • If ASSETS go UP (remember, we are looking at assets OTHER THAN cash, since it is the effect ON CASH we care about), then think: “we bought new assets.” SO IT’S A USE TRANSACTION (as in: “use of cash.”

  5. What Does It Mean? • If ASSETS go DOWN then think: “we sold some assets.” SO IT’S A SOURCE TRANSACTION (as in: “source of cash.”

  6. What Does It Mean? • If you can memorize the logic regarding ASSETS, you only need to remember that LIABILITIES and EQUITY are the exact opposite!

  7. What Does It Mean? • So…If LIABILITIES or EQUITY go UP then think: “we borrowed $” or “we received more $ from our owners.” SO IT’S A SOURCE TRANSACTION (as in: “source of cash.”

  8. What Does It Mean? • and…If LIABILITIES or EQUITY go DOWN then think: “we paid back what we borrowed” or “we gave $ (e.g., dividends) back to our owners.” SO IT’S A USE TRANSACTION (as in: “use of cash.”

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