courses › Accounting

The Cash Flow Statement

level 37 course

Where cash came from and went: operating, investing, and financing.

Pen and paper is fine · no calculator needed why?

Opens at level 37.

Builds on: Depreciation (not open yet)

the lesson

The idea, the techniques and a tip for each skill, right here. The Learn page adds worked examples for every skill and untimed practice.

Read the lesson · about 3 minutes

The idea

The cash flow statement explains why the bank balance changed. It sorts every movement of cash into three sections: operating (running the business), investing (buying or selling long-term assets, like equipment), and financing (borrowing, repaying loan principal, and money to and from owners).

Some items are not cash flows at all, such as depreciation and a sale on credit not yet collected.

Profit and cash from operations differ because of those items and because of timing: cash tied up in receivables and inventory, and bills not yet paid.

Techniques

Sort by the other party

Deciding which section a cash movement belongs in.

Customers, staff, suppliers of materials, and rent: operating.
Equipment, vehicles and buildings bought or sold: investing.
Loans received, principal repaid, and owner money: financing.

worked example

Example: A bike shop collects $6,000 from customers, pays $2,500 of wages, buys a $4,000 repair stand, and takes out a $3,000 loan. What is its cash flow from operating activities?

Operating: customers and wages only.
$6,000 − $2,500 = $3,500.

Answer: $3,500

Profit to cash, line by line

Finding cash from operations, starting from net income.

Start with net income and add back depreciation.
Subtract rises in receivables or inventory; add falls.
Add rises in payables; subtract falls.

worked example

Example: Net income is $10,000. Depreciation is $2,000. Accounts receivable rose by $3,000 and accounts payable rose by $1,000. What is cash from operations?

$10,000 + $2,000 − $3,000 + $1,000 = $10,000.
Receivables rose, so cash is still out with customers.

Answer: $10,000

Add the three sections

Section totals are given.

Keep each sign: outflows are negative.
The three together are the net change in cash.
Add that to starting cash for ending cash.

worked example

Example: Cash starts the year at $8,000. Cash from operations is $15,000, investing is −$9,000, and financing is −$2,000. What is ending cash?

Net change: $15,000 − $9,000 − $2,000 = $4,000.
Ending cash: $8,000 + $4,000 = $12,000.

Answer: $12,000

Tips by skill

TipOperating, investing, or financing?: Customers, staff and suppliers of materials: operating. Long-term assets: investing. Loans, principal repaid and owner money: financing. Depreciation and credit sales move no cash.
TipCash from operations: Net income plus depreciation, minus rises in receivables and inventory, plus rises in payables. Falls work the other way.
TipNet change in cash: Add the three sections with their signs. For ending cash, add that total to the starting cash.

Watch out for

Adding a rise in receivables. Those are sales not yet collected, so they hold cash back.
Calling principal repayment operating because it is a regular payment. Principal repaid to a lender is financing.
Adding outflows as if they were inflows. A negative section subtracts.

skills · practice stats

From rounds of this course only: box, review and test-out answers are left out. Once a skill has 40 tries, it compares your first 20 tries with your last 20.

Operating, investing, or financing? par 10 s not tried yet
worked example
The business repays $14,000 of loan principal. Which kind of cash flow is this?
1. Not a cash flow
2. Investing
3. Financing
4. Operating
Answer: Financing
1. Operating = running the business; investing = buying or selling long-term assets; financing = money to and from lenders and owners.
2. Repaying principal is money back to a lender: financing.
Cash from operations par 25 s not tried yet
worked example
Net income is $19,000. Depreciation is $6,500. Inventory fell by $2,500 and accounts payable rose by $7,000. What is cash from operations? (Use a minus sign if negative.)

Answer: $35,000.00
1. Start with net income and add back depreciation (no cash used). Rising receivables or inventory use cash; rising payables keep it (and the reverse when they fall).
2. $19,000 + $6,500 + $2,500 (inventory fell) + $7,000 (payables rose) = $35,000.
Net change in cash par 21 s not tried yet
worked example
Cash from operations is $30,000, investing is −$4,000 (new equipment), and financing is −$5,000 (owner distributions). What is the net change in cash? (Use a minus sign if negative.)

Answer: $21,000.00
1. Add the three sections: $30,000 + (−$4,000) + (−$5,000) = $21,000.

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