The cash flow statement explains why cash changed during the year, in three parts: operating activities (the business itself), investing activities (buying and selling long-term assets) and financing activities (borrowing, repaying and paying owners). It ends at the cash figure on the balance sheet.
| Note | 2025 | |
|---|---|---|
| Operating activities | ||
| Net income | 87,000 | |
| Amortization (not a cash cost)1 | 42,000 | |
| Increase in accounts receivable2 | (41,000) | |
| Increase in inventory | (9,000) | |
| Increase in prepaid expenses | (1,000) | |
| Increase in accounts payable | 8,000 | |
| Increase in income taxes payable | 2,000 | |
| Cash from operating activities | 88,000 | |
| Investing activities | ||
| Purchase of equipment | (60,000) | |
| Cash used in investing activities | (60,000) | |
| Financing activities | ||
| Proceeds of long-term debt | 20,000 | |
| Repayment of long-term debt | (28,000) | |
| Dividends paid | (8,000) | |
| Cash used in financing activities | (16,000) | |
| Increase in cash | 12,000 | |
| Cash, beginning of year | 52,000 | |
| Cash, end of year3 | 64,000 | |
- 1Amortization is added back because it reduced net income without any cash leaving.
- 2Slow-paying customers cost $41,000 of cash. That is the receivables increase on the balance sheet, turned into a cash effect.
- 3It ties. $64,000 is the cash on the balance sheet. If a cash flow statement does not end at the balance-sheet cash figure, something is wrong.
How to read it
- Is operating cash flow positive, and close to net income? Here $88,000 against $87,000 of profit: healthy, even after the receivables drag.
- Is investing paid for by operations? $60,000 of equipment against $88,000 from operations: yes.
- What is financing doing? Net repayment of debt and a modest dividend. The business is reducing its borrowing, not depending on it.
Not every set of compiled statements includes a cash flow statement. If yours does not, you can build a rough one from two years of balance sheets and the income statement, using exactly the steps above.
