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August 28, 2026·Accounting·Pasento

Understanding the Statement of Cash Flows

A statement that explains how cash moved through operating, investing, and financing activities during a period.

Definition

A Statement of Cash Flows explains why the cash balance changed during a period. On the books, this is the report that ties two successive cash numbers together.

It groups the movement into operating, investing, and financing activities. The bottom line is the net change in cash.

The period matches the Income Statement. A March Statement of Cash Flows covers March, not a single day.

If you use the indirect method, you start at net income and adjust. The direct method instead lists cash received from customers and cash paid to vendors.

Where it shows up

Balance Sheet: Related to the change in cash between two dates.

P&L: Related to net income used as the starting point under the indirect method.

Cash flow: Located as the explanation of operating, investing, and financing cash.

See also: Cash Flow From Operations · Cash Flow From Investing · Cash Flow From Financing

When you look at your reports, this is the statement that answers where the cash went. Operating cash is the day-to-day running of the shop; investing cash is equipment and other long-term assets; financing cash is loans, owner money in, and owner money out.

A profitable month can still show a cash drop. That usually means you bought equipment, paid down a loan, or waited on a large receivable.

The Balance Sheet only shows the cash number at each date. This statement is the bridge between those two numbers.

The profit and loss statement does not explain cash. Net income is often the first line here, but it is only the starting point.

Many small-business packs print this next to the P&L so you can see profit and cash in the same sitting. Read both; they answer different questions.

How it works

Most small-business books build the operating section with the indirect method. You start at net income, then add back non-cash expenses such as depreciation.

You then adjust for changes in working capital. If receivables rose, you collected less than you sold, so operating cash goes down.

If inventory rose, you spent cash stocking the shelf. If payables rose, you held onto cash by taking longer to pay vendors.

Investing activities are usually equipment, vehicles, and other long-lived purchases, plus any sales of those items. A new espresso machine is a cash outflow here even though it is an asset on the Balance Sheet.

Financing activities are borrowing, repayment, owner contributions, and distributions. A loan draw raises cash here; a loan payment lowers it.

Add the three sections and you have the net change in cash. That change plus beginning cash should equal ending cash on the Balance Sheet.

Example

A neighborhood cafe shows $4,000 of March profit. It also bought a $6,000 espresso machine with cash and is still waiting on a $3,000 catering invoice.

March sales include that catering job:

Debit: Accounts receivable $3,000

Credit: Catering revenue $3,000

Revenue and receivables both go up by $3,000. Cash has not moved, so profit is ahead of cash.

The machine purchase is an investing outflow of $6,000. Operating cash is also lower than profit because the $3,000 receivable has not been collected.

March can end with a $5,000 cash drop even though the P&L looks fine. The Statement of Cash Flows is the report that shows that split: profit in operations, cash out for the machine, and cash still sitting in a receivable.

When the catering customer pays in April, operating cash rises and accounts receivable falls. The April Statement of Cash Flows will show the collection that March profit already included.

Common mix-ups

A Statement of Cash Flows is not an Income Statement. Profit can be up while cash is down, and the reverse is also common.

Cash is not the same as cash flow from operations. Ending cash is the Balance Sheet number; operating cash is only the day-to-day section of this statement.

Buying equipment is not an operating expense on the P&L. It usually leaves profit alone in the month of purchase and shows up here as investing cash out.

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