ACC1100 · Introduction To Financial Accounting
Statement of Cash Flows
Accrual profit can look healthy while the bank account drains, so the Statement of Cash Flows (AASB 107 / IAS 7) answers the question the Income Statement and Balance Sheet cannot: where did the cash actually come from and go? In ACC1100 it is built one way only — the direct method — by reading the Cash at Bank ledger and classifying every movement into three buckets: Operating (day-to-day receipts minus payments), Investing (buying and selling non-current assets) and Financing (borrowings, owner capital, drawings and dividends). The three subtotals add to the net change in cash, which reconciles opening to closing cash, and closing cash must tie to the Balance Sheet. The whole exam skill is putting each line in the right bucket — especially the awkward ones: interest and tax are Operating, drawings and dividends are Financing, and a loan splits (interest Operating, principal Financing).
What this chapter covers
- 016.1 Why a fourth statement — profit ≠ cash flow
- 02The three sections: Operating / Investing / Financing
- 03Building it from the cash ledger (direct method)
- 04The classification table — the awkward ones
- 05A fully worked direct-method statement
- 06Traps, cash-flow improvement strategies & recap
Worked example: classify the cash ledger and reconcile
- +2Operating: 184,000 − 121,000 − 3,000 (interest) − 9,000 (tax) = +51,000. Interest and tax live in Operating.
- +1Investing: 7,000 (sale of van) − 26,000 (equipment) = (19,000) — a net outflow because the firm bought more than it sold.
- +1Financing: 30,000 (capital) + 20,000 (loan) − 12,000 (principal) − 16,000 (drawings) = +22,000. Drawings and loan principal are Financing.
- +1Net change in cash = 51,000 − 19,000 + 22,000 = +54,000.
- +1Reconcile: opening 8,000 + 54,000 = 62,000 closing cash, which must equal the cash-ledger balance and the Balance-Sheet cash line.
Key terms
- Direct method
- Reporting the actual cash receipts and payments (e.g. cash received from customers, cash paid to suppliers and employees), read straight off the cash ledger. No profit figure appears in the operating section — the only method taught in this unit.
- Operating activities
- Day-to-day trading cash: receipts from customers minus cash paid to suppliers, employees, rent and utilities. In this unit interest paid, interest received and income tax paid are also Operating.
- Investing activities
- Cash to acquire or dispose of non-current assets — buying or selling PPE and equipment. A negative investing subtotal is often a good sign: the firm is buying productive assets to grow.
- Financing activities
- Cash from changes in non-current liabilities and equity: borrowings and owner capital in; loan-principal repayments, drawings and dividends out. The principal of a loan is Financing; the interest on it is Operating.
- Reconciliation spine
- Net change in cash = Operating + Investing + Financing; opening cash + net change = closing cash, which must equal the Balance Sheet cash line. If it does not tie, a line is mis-classified or omitted.
Statement of Cash Flows FAQ
Is interest paid an Operating or a Financing cash flow?
In this unit, interest paid (and interest received) is Operating — it is part of running the business. The exam baits you toward Financing because interest relates to a loan, but only the loan’s principal repayment is Financing; the interest is Operating. Income tax paid is Operating too.
Where do drawings and dividends go?
Both are Financing outflows — they return cash to the owners, never Operating. A loan repayment therefore splits: interest to Operating, principal to Financing. These two rules (interest/tax Operating; drawings/dividends Financing) are the most-tested classifications in the topic.
Does depreciation appear in the cash-flow statement?
No. The statement tracks cash movements only, so depreciation, doubtful-debts expense, accruals, an unpaid invoice, a credit sale not yet collected and a revaluation are all excluded — they are non-cash. A credit sale enters Operating only when the cash is actually collected. (And because the unit uses the direct method, there is no indirect “profit + depreciation” reconciliation either.)
How do I know I have done it right?
It must reconcile: the three section subtotals add to the net change in cash, and opening cash plus that net change must equal closing cash — which in turn equals the cash-ledger balance and the Balance Sheet cash line. If those three figures don’t agree, you have mis-classified or missed a line.
Exam move
The direct method is mechanical, so the exam attacks the edges. Drill the classification table until the four baited lines are automatic — interest and tax to Operating, drawings and dividends to Financing, a loan splitting interest/principal, and buying or selling PPE to Investing. Remember the statement is cash-only, so reject every non-cash item (depreciation, accruals, uncollected credit sales) on sight, and never start the operating section with profit. Finish every answer by reconciling opening + net change = closing cash to the Balance Sheet line, and add one sentence interpreting the O/I/F pattern — the exam rewards the reading, not just the bottom line.
