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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 4.88 min answerUpdated 2026-06-02

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What this dot point is asking
Why a separate cash statement
The three classifications
Why profit and operating cash flow differ
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

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:

\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.

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.

540\,000 - 410\,000 - 10\,000 - 20\,000 = 100\,000 \text{ inflow}

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.

-90\,000 + 12\,000 = -78\,000 \text{ net outflow}

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.

50\,000 - 18\,000 = 32\,000 \text{ inflow}

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.

100\,000 - 78\,000 + 32\,000 = 54\,000 \text{ net change}

25\,000 + 54\,000 = 79\,000 \text{ closing cash}

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.

Exam-style practice questions

Practice questions written in the style of SCSA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

WACE 20218 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.

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An 8 mark response needs the three classified sections, the net change, and closing cash.

Operating. $610\,000 - 470\,000 - 12\,000 - 25\,000 = 103\,000$ inflow (interest and tax paid are operating in this course).

Investing. $-120\,000 + 15\,000 = -105\,000$ , a net outflow.

Financing. $80\,000 - 30\,000 - 22\,000 = 28\,000$ inflow (share issue in, loan repayment and dividends out).

Net change in cash. $103\,000 - 105\,000 + 28\,000 = 26\,000$ . Closing cash $= 40\,000 + 26\,000 = 66\,000$ . 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 20236 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.

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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.