What is reconciling to the bank balance?

TASAccountingSyllabus dot point

How does the cash flow statement explain where cash came from and went?

Prepare and interpret a cash flow statement classified into operating, investing and financing activities.

Classifying cash movements into operating, investing and financing activities, preparing the statement and interpreting what each section reveals.

Generated by Claude Opus 4.77 min answerUpdated 2026-05-30

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking

Where the cash budget looks forward, the cash flow statement looks back: it is a historical report of cash that actually moved. Unit 4 uses it as an analytical tool, because profit alone does not show whether a business is generating or consuming cash. Sorting the flows into three activities reveals the quality of that cash.

The three activities

Operating activities: cash from the main trading operations (receipts from customers) less cash paid to suppliers, employees, for expenses and to the ATO. This shows whether day to day trading generates cash.
Investing activities: cash spent buying non-current assets and cash received from selling them. Negative investing flow usually means the business is growing its asset base.
Financing activities: cash from owners (capital) and lenders (loans received), less repayments and drawings. This shows how the business is funded.

Reconciling to the bank balance

The three sections combine to the net increase or decrease in cash, which links the opening and closing bank balances.

Closing\ cash = Opening\ cash + Operating + Investing + Financing

Worked example

A classified cash flow statement

Given information

Opening cash $4\,000$ . Receipts from customers $150\,000$ ; payments to suppliers and employees $120\,000$ ; GST paid to ATO $5\,000$ . Bought equipment $18\,000$ ; sold an old vehicle for $3\,000$ . Loan received $10\,000$ ; drawings $9\,000$ .

Operating

$150\,000 - 120\,000 - 5\,000 = \$ 25,000$ inflow.

Investing

$-18\,000 + 3\,000 = -\$ 15,000$ outflow.

Financing

$10\,000 - 9\,000 = \$ 1,000$ inflow.

Reconciliation

Net change $= 25\,000 - 15\,000 + 1\,000 = \$ 11,000$.
Closing cash $= 4\,000 + 11\,000 = \$ 15,000$.

Interpretation

Trading generated strong operating cash ( $25\,000$ ), which funded the equipment purchase with cash to spare. The business is self-sustaining and growing its asset base without heavy borrowing, a healthy pattern.

Why this matters

The cash flow statement explains the survival question that profit cannot: can the business actually pay its way. A firm reporting profit but negative operating cash flow is a warning sign. Exam interpretation marks come from commenting on each section, especially whether operating activities fund investing and financing rather than the reverse.