Statement of Cash Flows

Learn It

The Statement of Cash Flows answers a simple question: Where did the business's cash come from, and where did it go? It starts with the beginning cash balance, lists all the cash that came in and went out during the period, and ends with the ending cash balance.

Why do we need this statement when we already have a P&L? Because profit and cash are not the same thing. A business can earn $20,000 in revenue, show a nice profit on the P&L, and still have very little cash in the bank — because the customers have not paid yet.

As we covered in Cash Basis vs. Accrual Basis, revenue is recognized when it is earned, not when the cash arrives. The Statement of Cash Flows bridges the gap between profit and actual cash.

Three Categories of Cash Flow

Every cash event falls into one of three categories:

Why Profit and Cash Are Different

Here are the most common reasons profit on the P&L does not equal the change in cash:

• Accounts Receivable increases: Revenue was earned and appears on the P&L, but the cash has not been collected yet. Profit goes up, but cash does not.
• Accounts Payable increases: An expense was recorded on the P&L, but the bill has not been paid yet. Profit goes down, but cash has not left.
• Equipment is purchased: Cash goes out, but the full cost does not hit the P&L immediately — it is spread over time through depreciation.
• Money is borrowed: Cash comes in, but it is not revenue, so it does not appear on the P&L. It appears on the cash flow statement as a financing activity.
• Loan payments are made: Cash goes out, but only the interest portion is an expense on the P&L. The principal repayment reduces the liability, not profit.

The Statement of Cash Flows brings all of these together into one picture of how cash actually moved.

See It

Let us look at Northstar Creative — the same business from the P&L and Balance Sheet lessons. The P&L shows a net income of $17,500. But the business's cash only increased by $16,500. Here is why:

Notice: the P&L shows $17,500 in net income, but cash only went up by $16,500. The difference comes from several places:

• The business earned more revenue than it collected in cash — some revenue is still in Accounts Receivable.
• The business spent $5,000 on equipment, but only a portion of that shows up as depreciation expense on the P&L.
• The business borrowed $10,000, which brought in cash but is not revenue.
• The business made a $1,500 loan payment, but only the interest portion is an expense on the P&L.

The Statement of Cash Flows ties all of this together. It explains the full journey from beginning cash to ending cash.

Do It

Build a Statement of Cash Flows from a list of cash events. Place each event into the right category, then type the totals. The ending cash must agree with the business's actual cash.

Prove It

Answer each question, then read the explanation. There's no score — this is just to help the ideas stick.

Ready for more than a short exercise?

Building one Statement of Cash Flows from a labeled list of events is different from reviewing cash activity produced by a complete set of books and deciding where each item belongs. QBO Dojo practice clients let you work with realistic financial statements inside QuickBooks Online and trace cash flow across many transactions at once.

Key Takeaways