The Cash Flow Statement
Where cash came from and went: operating, investing, and financing.
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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).
more of the idea
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
- Customers, staff, suppliers of materials, and rent: operating.
- Equipment, vehicles and buildings bought or sold: investing.
- Loans received, principal repaid, and owner money: financing.
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
- Start with net income and add back depreciation.
- Subtract rises in receivables or inventory; add falls.
- Add rises in payables; subtract falls.
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
- Keep each sign: outflows are negative.
- The three together are the net change in cash.
- Add that to starting cash for ending cash.
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
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.
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Operating, investing, or financing?
worked example
The business repays $14,000 of loan principal. Which kind of cash flow is this?
- Not a cash flow
- Investing
- Financing
- Operating
- Operating = running the business; investing = buying or selling long-term assets; financing = money to and from lenders and owners.
- Repaying principal is money back to a lender: financing.
Answer: Financing
Cash from operations
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.)
- 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).
- $19,000 + $6,500 + $2,500 (inventory fell) + $7,000 (payables rose) = $35,000.
Answer: $35,000.00
Net change in cash
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.)
- Add the three sections: $30,000 + (−$4,000) + (−$5,000) = $21,000.
Answer: $21,000.00