The Cash Flow Statement

Profit and cash are not the same thing — the cash flow statement explains exactly where a business's cash came from and where it went, sorted into three categories.

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Key things to remember

1Cash Flow Statement shows incoming and outgoing cash for a period, unlike the accrual-based income statement.
2Operating Activities: cash tied to normal day-to-day selling and expenses.
3Investing Activities: cash tied to buying/selling long-term assets.
4Financing Activities: cash tied to loans, owner investment/withdrawals, and dividends.
5Net Income and net cash flow can differ significantly in the same period — profit is not the same as cash.

A profitable business can still run out of cash. A sale on account boosts Net Income the moment it's recorded, but it does not put a single dollar in the bank until the customer actually pays. A business could report a healthy profit while its owners can't cover next week's payroll — which is exactly why a third major financial statement exists. A Cash Flow Statement is a financial statement that shows the incoming and outgoing cash for a particular financial period, answering a question the income statement and balance sheet cannot: where did the cash actually come from, and where did it actually go?

Why profit ≠ cash

Net Income includes non-cash items (like accrued revenue no one has paid yet, or depreciation that never involves writing a cheque) and excludes real cash events that aren't revenue or expenses at all (borrowing money, buying equipment, an owner's cash withdrawal). Two businesses can report the identical Net Income and have completely different cash positions.

The three categories

Category	Definition	Typical examples
Operating Activities	Involve selling goods and services to customers and paying the expenses of operating a business	Cash from customers; cash paid to suppliers, employees, and for rent
Investing Activities	Involve the acquisition of long-term assets required to produce the goods and services sold to customers	Buying equipment (cash out); selling old equipment or land (cash in)
Financing Activities	Involve items required to start and operate the business	Bank loan proceeds (cash in); loan repayments, owner's withdrawals, Dividends paid to shareholders (cash out)

Where every cash flow belongs

Dividends — the distribution of a company's profits to its shareholders — always appear under financing activities, never operating activities, because paying a dividend is a decision about how the company is financed and rewarded, not a cost of selling goods or services.

Cash Equivalents

Cash Equivalents are short-term, highly liquid assets that are readily convertible to cash — think a 30-day term deposit or a Government of Canada treasury bill. A cash flow statement typically tracks the combined change in "cash and cash equivalents," not just the literal Cash account.

Fig 1Operating, investing, and financing activities, and how each changes the cash balance

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1

A company reports: cash from operating activities +$45,000; cash used in investing activities −$18,000 (new equipment); cash used in financing activities −$10,000 (loan repayment). The beginning cash balance was $22,000. Find the ending cash balance.

Example 2

Classify each cash flow as Operating, Investing, or Financing: (a) $3,000 paid to a supplier for merchandise; (b) $50,000 received from a new bank loan; (c) $12,000 paid to purchase a delivery truck; (d) $2,500 paid as dividends to shareholders.

Where marks get lost

Assuming a profitable business (positive Net Income) must also have positive cash flow — the two can point in opposite directions in the same period.
Classifying the purchase of equipment as an operating activity — it belongs in investing activities, since equipment is a long-term asset.
Classifying dividends paid as an operating expense — dividends are a financing activity, not an expense at all.
Forgetting that cash equivalents (like short-term treasury bills) are tracked together with Cash on this statement.

Flashcards 6

Cash Flow Statement

Cash Equivalents

Operating Activities

Investing Activities

+ 2 more

Practice

Cash received from a customer paying an account receivable belongs under:

Cash paid to purchase land for a new store belongs under:

Operating activities +$60,000; Investing activities −$25,000; Financing activities −$12,000. What is the net change in cash?

Give one reason a company can be profitable but still run short of cash.

Which of these is a financing activity?

Name a short-term, highly liquid asset that would be grouped with Cash on a cash flow statement.

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