Statement of Cash Flows WACE Accounting and Finance Unit 3
“Prepare a Statement of Cash Flows classifying cash flows into operating, investing and financing activities, reconcile to the change in cash, and interpret what the statement reveals about the business”
The Statement of Cash Flows reports actual cash movements over the period, classified into three activities. Operating cash flows come from the main trading activities, such as receipts from customers and payments to suppliers and employees. Investing cash flows come from buying and selling non-current assets. Financing cash flows come from share issues, borrowings and dividends. The three net flows together explain the change in cash, which reconciles opening cash to closing cash.
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What this dot point is asking
SCSA wants you to classify cash flows into the three activities, total them to the net change in cash, reconcile to the closing balance, and interpret the pattern.
Why a separate cash statement
Profit and cash differ because of the accrual basis: credit sales, depreciation, accruals and prepayments all push profit away from cash. The Statement of Cash Flows strips out accruals and shows only cash, answering a question the Income Statement cannot: did the business actually generate cash this year?
The three classifications
Operating activities are the principal revenue-producing activities and other activities that are not investing or financing, such as cash from customers and cash paid to suppliers, employees and for interest and tax. Investing activities are the acquisition and disposal of long-term assets, such as buying or selling property, plant and equipment. Financing activities change the size and composition of equity and borrowings, such as issuing shares, raising or repaying loans, and paying dividends.
Receipts from customers and payments to suppliers and employees are operating. Purchase or sale of equipment, vehicles and buildings is investing. Proceeds from a share issue or a new loan, and repayment of a loan or payment of dividends, are financing. Interest paid and tax paid are typically operating in this course. A non-cash item such as depreciation never appears as a cash flow at all.
Why profit and operating cash flow differ
The gap between profit and operating cash flow is worth understanding in detail, because examiners often ask you to explain it. Profit is measured on the accrual basis: revenue is recognised when earned and expenses when incurred. Cash moves on a different timetable. A credit sale adds to profit immediately but adds to cash only when the customer pays, so a rise in receivables means profit runs ahead of cash. Buying inventory on credit, or stockpiling goods, ties up cash without affecting profit yet. Non-cash expenses such as depreciation reduce profit but involve no cash outflow at all, because the cash left earlier when the asset was purchased. The Statement of Cash Flows strips all of this back to actual cash, answering a question the Income Statement cannot.
Reconciling to closing cash
The structure totals to the change in cash, which then ties back to the cash balance on the Balance Sheet:
Interpreting the statement
A healthy business usually shows positive operating cash flow that funds its investing needs. Negative investing flow is often a good sign, because it means the business is buying assets to grow. Financing flow shows how growth is funded: through borrowings, new shares, or by returning cash to owners as dividends. A business reporting profit but with negative operating cash flow is a warning sign, often signalling overdue customers or rising inventory.
Corin Ltd reports: receipts from customers $540 000; payments to suppliers and employees $410 000; interest paid $10 000; income tax paid $20 000; purchase of equipment $90 000; proceeds from sale of an old vehicle $12 000; proceeds from a share issue $50 000; dividends paid $18 000. Opening cash was $25 000.
Step 1: Calculate operating cash flow
Operating activities cover the principal trading flows. Receipts from customers are an inflow; payments to suppliers and employees, interest paid, and income tax paid are outflows. Interest and tax are classified as operating in this course.
Step 2: Calculate investing cash flow
Investing activities involve the acquisition and disposal of long-term assets. The equipment purchase is a cash outflow, while the proceeds from selling the old vehicle are a cash inflow. The net result is an outflow, which typically signals the business is investing in its asset base.
Step 3: Calculate financing cash flow
Financing activities change the composition of equity and borrowings. The share issue brings cash in; the dividend paid sends cash to shareholders and is classified as financing rather than operating in this course.
Step 4: Reconcile to closing cash
Adding the three sections gives the net change in cash for the period. Adding that change to opening cash reconciles to the cash balance shown on the Balance Sheet, confirming all items have been correctly classified and no cash flows have been double counted.
Final answer: Operating inflow is $100 000, investing outflow is $78 000, financing inflow is $32 000, net change in cash is $54 000, and closing cash is $79 000. The pattern is strong: operating cash of $100 000 more than covered the $78 000 invested in assets, and the share issue strengthened cash further while still paying a dividend.
Depreciation is a non-cash allocation of an asset's cost, so it never appears as a payment in the Statement of Cash Flows. The cash already left when the asset was bought, and that outflow is shown once under investing activities. Listing depreciation as an operating payment double counts the asset's cost and understates operating cash flow.
Exam-style questions
Questions in the style of SCSA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
WACE 2021-style8 marksFrom the following, prepare the three sections of a Statement of Cash Flows and reconcile to closing cash. Receipts from customers $610 000; payments to suppliers and employees $470 000; interest paid $12 000; tax paid $25 000; purchase of equipment $120 000; proceeds from sale of vehicle $15 000; proceeds from a share issue $80 000; loan repayment $30 000; dividends paid $22 000. Opening cash $40 000.Show worked answer →
An 8 mark response needs the three classified sections, the net change, and closing cash.
Operating. inflow (interest and tax paid are operating in this course).
Investing. , a net outflow.
Financing. inflow (share issue in, loan repayment and dividends out).
Net change in cash. . Closing cash . Markers reward correct classification of each item, especially interest and tax as operating and dividends as financing, accurate totals, and the reconciliation to closing cash.
WACE 2023-style6 marksA company reports a healthy profit but a negative net cash flow from operating activities. Explain two reasons this can happen, and explain why this pattern is a warning sign.Show worked answer →
A 6 mark response needs two reasons and the interpretation.
Reason 1. Credit sales are recognised as revenue (boosting profit) before the cash is collected, so a large rise in accounts receivable means profit is earned but cash has not yet arrived.
Reason 2. A build-up of inventory ties cash up in stock that has been paid for but not yet sold, again depressing operating cash while profit looks unaffected. Accruals and prepayments work similarly.
Warning sign. Profit is an accrual measure, but bills are paid in cash. A profitable business that cannot generate cash from operations may struggle to pay suppliers, wages and loans, risking insolvency despite looking profitable on paper. Persistent negative operating cash flow can signal overdue debtors, overstocking, or aggressive revenue recognition. Markers reward two valid accrual-versus-cash reasons and the solvency-risk interpretation.