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How is a Statement of Cash Flows prepared, and what do its operating, investing and financing sections reveal about a company?

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

WACE Year 12 Accounting and Finance Unit 3 on the Statement of Cash Flows: classifying cash flows into operating, investing and financing activities, reconciling to the net change in cash and the closing balance, and interpreting what the statement reveals about a company.

Generated by Claude Opus 4.77 min answerUpdated 2026-05-29

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What this dot point is asking
Why a separate cash statement
The three classifications
Reconciling to closing cash
Interpreting the statement

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

Reconciling to closing cash

The structure totals to the change in cash, which then ties back to the cash balance on the Balance Sheet:

\text{Net change in cash} = \text{Operating} + \text{Investing} + \text{Financing}

\text{Closing cash} = \text{Opening cash} + \text{Net change in cash}

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.

Building the three sections

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.

Operating cash flow: $540\,000 - 410\,000 - 10\,000 - 20\,000 = 100\,000$ inflow.

Investing cash flow: $-90\,000 + 12\,000 = -78\,000$ , a net outflow.

Financing cash flow: $50\,000 - 18\,000 = 32\,000$ inflow.

Net change in cash: $100\,000 - 78\,000 + 32\,000 = 54\,000$ .

Closing cash: $25\,000 + 54\,000 = 79\,000$ . 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.