Accounting · Foundations

Statement of Cash Flows

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In 30 seconds
Why this matters
The college version
Eli explains
Worked example
Key takeaway
Quick check
Study tools
Sources & references

In 30 seconds

The is a financial report showing the cash coming into a business and going out over a period, organized by activity — the this lesson's definition comes from OpenStax's Principles of Accounting. It has three sections: operating, investing, and financing. Profit is an opinion; cash is a fact. Because a profitable business can still run out of cash, the statement answers the simplest question: can this business pay its bills?

Why this matters

The income statement reports profit, but profit is not the same as cash in the bank. Businesses pay employees, suppliers, and lenders with cash — and a company can show a healthy profit while its bank account drains. The statement of cash flows is where readers see where cash actually came from and where it went, which is precisely what lenders, owners, and managers need to judge whether the business can keep operating. Learning to read it separates a real sense of a company's health from the impression the income statement alone can give. That skill pays off in any role that watches money move: running a business, lending to one, or investing in one.

The college version

What the statement of cash flows is

OpenStax's Principles of Accounting defines the statement of cash flows as a financial statement listing the cash inflows and cash outflows for the business for a period of time. CFI describes cash flow in the same spirit: the increase or decrease in the amount of money a business has. Two halves of that definition matter. First, it tracks cash — currency that actually moved, not amounts earned on paper. Second, it covers a period — a month, a quarter, or a year — not a single moment. The statement is one of the four major financial statements; OpenStax's Section 2.1 lists the four in preparation order: income statement, statement of owner's equity, balance sheet, and statement of cash flows last. It is prepared last because it draws on the others. The organizing principle is activity: every cash movement is sorted into one of three sections — operating, investing, or financing.

The three sections

are the day-to-day activities a business uses to produce income. In OpenStax's words, operating cash flows come from sales and go to inventory, salaries, and utilities. One line: the daily business — money collected from customers in, money paid for the stuff of running the shop out. Original example: a bakery's operating section shows cash from bread sales and cash paid for flour, wages, and the electric bill. are transactions in long-term assets. One line: buying and selling the big things the business uses for years. Original example: the same bakery pays $18,000 cash for a second oven — that outflow goes in investing; selling its old van for $3,000 puts a there. are about raising money and paying it back. One line: money from lenders and owners in, repayments and dividends out. Original example: the bakery borrows $20,000 from the bank (an inflow) and repays $5,000 of the loan principal (an outflow). Each section nets to one number, and the three nets add up to the period's total change in cash.

Why cash matters separately

The income statement reports profit, but profit is built on the accrual basis, not on cash. CFI puts it plainly: income and profit are based on accrual accounting principles, which smooth out expenditures and match revenues to the timing of delivery, so a company's net income can be materially different from its cash flow. OpenStax makes the same point from the other side: accrual accounting creates timing differences between income statement accounts and cash — a revenue can be recorded in a different year than the one its cash arrives. That is why cash deserves its own statement. The honest framing, stated simply: profit is an opinion — a judgment built on rules about when to count revenue and expenses; cash is a fact — the money that actually moved. The income statement is a sibling topic with a lesson of its own; here it appears only as the contrast that explains why the cash flow statement exists.

Cash flow vs profit

A profitable business can still run out of cash. Here is an original example. Brightside Landscaping finishes $100,000 of work in March and bills its customers, who pay in sixty days — so no cash arrives in March. Meanwhile it pays $65,000 in crew wages and $20,000 for plants and materials, all in cash, during the month. The income statement reports revenue of $100,000, expenses of $85,000, and a profit of $15,000. The bank account tells another story: $0 in, $85,000 out. Brightside started March with $90,000, so after $85,000 of cash payments only $5,000 is left, and the $25,000 loan installment due at month-end goes unpaid. Profit of $15,000, and the business cannot pay its bills. Nothing in the numbers is wrong: the profit is real, and so is the cash shortage. Only the statement of cash flows shows both at once.

What the statement shows

OpenStax's Section 16.1 states the read directly: the statement answers two questions — what are the sources of cash, where does the cash come from, and what are the uses of cash, where does the cash go. Sources are the inflows: collections from customers, proceeds from selling equipment, money borrowed. Uses are the outflows: payments to suppliers and staff, purchases of equipment, loan repayments, dividends. The three sections organize the answer, and the bottom line is the — positive means cash increased over the period, negative means it decreased. The practical read: run your eye down the sections rather than the total — which activities produced the cash, and which consumed it? A business that generates cash from operating while spending on equipment tells a different story from one that stays afloat by borrowing.

The honest framing

Strip the statement to its simplest question: can this business pay its bills? Profit does not pay suppliers — cash does. That is why OpenStax's Section 2.1 notes that accounting provides cash flow information to potential lenders, and why OpenStax's Section 16.1 says the statement lets users see how well a company's income generates cash and predict its future cash generation. CFI is blunter: cash flow is the lifeblood of a company. The cash flow statement is the reality check because it undoes the accrual estimates — in CFI's phrase, it shows pure cash movements — and reports what actually happened to the money. A lender, an owner, or an employee can ask one question of the statement and get an honest answer: when the bills arrive, will the cash be there?

Eli explains

The same idea, in plain words

Explain it like I’m 10

The statement of cash flows is a business's cash report card for a stretch of time. It does not ask whether the business earned a profit — the income statement handles that question. It asks a simpler, harder one: did cash actually come in, did cash actually go out, and which kinds of activities moved it? The whole statement is one ledger with three drawers: everyday business in the operating drawer, big purchases and sales in the investing drawer, and borrowed or owner money in the financing drawer. Add up the three drawers and you get the change in cash for the period.

Picture it like this

Picture the business's cash as water in a tank. Three pipes feed or drain the tank. The operating pipe carries the daily flow: customer payments in, rent and wages out. The investing pipe moves big one-time amounts: buying a delivery van drains the tank, selling an old one tops it up. The financing pipe connects to the bank and the owners: a loan fills the tank, while loan repayments and dividends drain it. The statement of cash flows is the meter reading that shows how much water moved through each pipe over the year — and whether the tank ended higher or lower than it started.

Where the picture stops working

Pipes do not make judgment calls, but people classify some transactions, and the rules can place a single payment in a section that surprises you: interest paid, for example, sits in operating activities under U.S. GAAP. The tank level is also just one point in time — the statement covers a period, while the balance sheet captures the level on a single date. And water in a tank can sit there safely, whereas idle cash in a business often earns little, which is a different problem the analogy cannot show.

Worked example

Harbor Coffee runs a single coffee cart, and the owner wants to know where the year's cash went. The statement of cash flows answers it. Operating: customers paid $120,000 for coffee, while rent, wages, and supplies consumed $90,000 — net operating cash, +$30,000. Investing: she bought a second cart for $15,000 and sold the old one for $2,000 — net investing, −$13,000. Financing: she borrowed $20,000 from the bank and repaid $5,000 of the loan principal — net financing, +$15,000. Net change in cash: $30,000 − $13,000 + $15,000 = +$32,000. The year started with $8,000 in the bank and ended with $40,000. The three sections show the story behind the total: the cart's daily business produced the cash, the new cart consumed some of it, and borrowing covered the difference.

Key takeaway

The statement of cash flows tracks the cash coming in and going out over a period, organized into operating, investing, and financing activity — and it answers the simplest question a business faces: can it pay its bills?

Quick check

3 questions here, of 5 in this lesson’s practice set. Answers stay hidden until you check.

Question 1 of 3foundational

Which three sections make up the statement of cash flows?

Choose an answer, then check it.

Question 2 of 3intermediate

A bakery pays $18,000 cash for a second oven. In which section of its statement of cash flows does that payment appear?

Choose an answer, then check it.

Question 3 of 3intermediate

Harbor Coffee started the year with $8,000 cash. Over the year it collected $120,000 from customers, paid $90,000 in operating costs, bought a second cart for $15,000, borrowed $20,000, and repaid $5,000 of loan principal. What is its ending cash balance?

Choose an answer, then check it.

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Study tools & related lessonsYou’ll learn to · Common mistakes · Easily confused · Key vocabulary · Related

You’ll learn to

Define the statement of cash flows as a report of cash coming in and going out over a period, organized by activity, using the working definition from OpenStax's Principles of Accounting.
Name the three sections — operating, investing, and financing — and give one original example of each.
Explain why cash matters separately from profit: profit is an opinion, cash is a fact.
Distinguish cash flow from profit, and explain how a profitable business can still run out of cash.
Describe what the statement shows: where cash came from and where it went.
Explain the honest framing: the statement answers the simplest question — can this business pay its bills?

Common mistakes

Treating net income as cash in the bank — assuming the profit on the income statement equals the change in cash.
Profit is measured on the accrual basis and can differ from cash flow in a period; check the statement of cash flows for the actual money movement.
Judging a section's sign in isolation — assuming negative investing cash flow is always bad or positive financing cash flow is always good.
Buying equipment shows up as negative investing cash but may be growth spending; OpenStax notes that investors do not always take negative cash flow as negative, so read the sign with context.
Misclassifying activities — putting an equipment purchase in operating or a loan repayment in investing.
Long-term assets belong in investing, borrowing and repaying debt belong in financing, and the day-to-day business belongs in operating.
Reading only the bottom line — looking at the net change in cash and skipping the three sections.
The net number hides which activities produced or consumed the cash; the sections are where the information lives.

Easily confused

Cash flow vs. Profit

Profit is measured on the accrual basis and can differ materially from cash flow in a period; cash flow is the actual money that moved in and out.