ACF5950 · Introduction to Financial Accounting
The Statement of Cash Flows
Week 11 prepares and interprets the statement of cash flows, classifying cash movements into operating, investing and financing activities and reconciling to the change in cash. It distinguishes cash flow from accrual profit — building on the Chapter 8 material seeded in Week 1 — and applies the direct method to operating cash flows. Correct classification and the reconciliation of closing cash to the balance sheet are standard exam and Quiz/Test tasks. The week shown is the unit's standard arc — confirm the exact teaching week on Moodle / the unit outline.
What this chapter covers
- 01Purpose of the statement: explaining the change in cash and cash equivalents over the period
- 02Operating activities: cash effects of transactions entering profit (receipts from customers, payments to suppliers and employees, interest, tax)
- 03Investing activities: acquiring and disposing of non-current assets and investments
- 04Financing activities: owner contributions/drawings or share issues, dividends, borrowing and repaying loans
- 05Net change in cash = operating + investing + financing; closing cash = opening + net change
- 06The direct method (gross operating receipts and payments) vs the indirect method (profit adjusted for non-cash and working-capital items)
- 07Reconciling closing cash to the balance-sheet cash line; cash flow vs accrual profit
Classify cash flows and reconcile to closing cash
- +1Operating activities (direct method): receipts from customers 210,000 − payments to suppliers 120,000 − payments to employees 45,000 − interest paid 5,000 = 40,000 net operating inflow.
- +1Investing activities: purchase of equipment (40,000) + proceeds from sale of vehicle 8,000 = (32,000) net outflow.
- +1Financing activities: bank loan proceeds 30,000 − owner's drawings 20,000 = 10,000 net inflow.
- +1Net change in cash = 40,000 − 32,000 + 10,000 = 18,000; closing cash = opening 18,000 + 18,000 = 36,000, which must equal the balance-sheet cash line.
Key terms
- Statement of cash flows
- A statement reporting cash inflows and outflows for the period, classified into operating, investing and financing activities, and explaining the change in cash.
- Operating activities
- Cash flows from the entity's main revenue-producing activities — receipts from customers and payments to suppliers and employees (and interest and tax, by convention).
- Investing activities
- Cash flows from acquiring and disposing of non-current assets and other investments.
- Financing activities
- Cash flows from changes in contributed equity and borrowings — owner contributions and drawings, share issues, dividends, and loan proceeds and repayments.
- Direct method
- A presentation of operating cash flows listing the major classes of gross cash receipts and payments.
- Indirect method
- A presentation starting from profit and adjusting for non-cash items (such as depreciation) and changes in working-capital accounts to derive operating cash flow.
The Statement of Cash Flows FAQ
Why is cash flow different from profit?
Because profit is measured on the accrual basis — revenue when earned and expenses when incurred — while cash flow tracks actual cash movement. Credit sales raise profit before cash arrives, depreciation reduces profit without any cash outflow, and buying an asset uses cash without affecting profit. The statement of cash flows reconciles these, showing how a profitable entity can still be short of cash, and vice versa.
How do I classify a cash flow into operating, investing or financing?
By the nature of the underlying activity. Operating covers trading — receipts from customers and payments to suppliers and employees. Investing covers buying and selling non-current assets and investments. Financing covers raising and repaying funds — loans, owner contributions and drawings, and dividends. Classify by what the cash was for, not by whether it is an inflow or outflow.
What is the difference between the direct and indirect methods?
They differ only in how operating cash flow is presented. The direct method lists gross operating receipts and payments (from customers, to suppliers, to employees). The indirect method starts from profit and adjusts for non-cash items like depreciation and for changes in receivables, inventory and payables. Investing and financing sections are the same under both, and both reach the same net change in cash.
Can AI help me with the statement of cash flows in ACF5950?
Yes, as a tutor. Sia can classify each cash flow, total the three activity sections, and reconcile closing cash to the balance sheet, and can contrast the direct and indirect operating presentations. It is for understanding and rehearsal, not for graded work — confirm the AI policy on Moodle, as Monash academic-integrity rules apply.
Exam move
Practise sorting a mixed list of cash flows into operating, investing and financing by the nature of each item — trading in operating, non-current assets in investing, funding in financing — and always finish by reconciling closing cash (opening + net change) to the balance-sheet cash line, which is your built-in check. Be able to contrast cash flow with accrual profit, since a conceptual part often asks why a profitable business can run short of cash (credit sales, inventory build-up, asset purchases). Know both the direct and indirect operating presentations even if the unit favours one. Confirm the unit's convention for interest and tax classification. Classification and the closing-cash reconciliation are dependable exam and Quiz/Test marks, so rehearse them under time pressure.
Working through The Statement of Cash Flows in ACF5950? Sia is AskSia’s AI Business and Economics tutor — ask any ACF5950 The Statement of Cash Flows question and get a clear, step-by-step explanation grounded in how ACF5950 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
