BUSS1030 · Accounting For Decision Making
Statement of Cash Flows
Accrual statements can show a healthy profit while the bank account quietly empties — the statement of cash flows fixes that blind spot. It reports the actual cash inflows and outflows over a period, sorted into three activities (operating, investing, financing), and reconciles opening cash to closing cash (the cash line on the balance sheet). This chapter teaches the three-activity classification, why cash ≠ profit (credit sales, credit expenses, and non-cash depreciation), and how to build the operating section by the direct method — listing real receipts and payments. The single most important scope flag: BUSS1030 uses the direct method only and explicitly ignores the indirect method, so you never start from net income and never add back depreciation. In this unit, depreciation appears nowhere on the cash flow statement.
What this chapter covers
- 019.1 The three activities: operating, investing, financing
- 02The cash-flow structure (net change ties opening to closing cash)
- 039.2 Why cash ≠ profit — the accrual gap
- 04Depreciation as a non-cash item (no add-back; direct method)
- 05Building the operating section by the direct method
- 06Cash from customers; cash paid to suppliers / employees
- 07The closing-cash tie-back to the balance sheet
Worked example: classify the cash flows, then explain a profit/cash gap
- +1(a) Cash from customers → operating (day-to-day trading).
- +1(b) Buy equipment → investing (a non-current asset, not an expense).
- +2(c) and (d) Loan repayment and owner’s drawings → financing (dealings with lenders and owners).
- +2Why operating cash < net income. Net income is accrual: it counts credit sales not yet collected (receivables rise) and includes non-cash depreciation. Operating cash counts only money actually received and paid — so it can be well below profit.
Key terms
- Operating activities
- Day-to-day trading cash flows: in from customers; out to suppliers, employees, and for rent, electricity and interest. A business whose cash comes mainly from operating activities is self-sustaining.
- Investing activities
- Cash flows from buying and selling non-current assets and investments: out to buy equipment, vehicles or land; in from selling a non-current asset.
- Financing activities
- Cash flows from dealings with owners and lenders: in from owner capital and new borrowings; out for drawings and loan repayments.
- Direct method
- Builds the operating section by listing the actual cash receipts and payments and netting them — the only method BUSS1030 uses. The indirect method (start from net income, add back depreciation) is explicitly excluded.
- Non-cash expense
- An expense that reduces net income but moves no cash — depreciation is the standard example. Under the direct method it never appears on the cash flow statement; the cash left earlier, when the asset was bought (an investing outflow).
Statement of Cash Flows FAQ
Does BUSS1030 use the direct or indirect method?
The direct method only. You build the operating section by listing the real cash receipts (from customers) and real cash payments (to suppliers, employees, for expenses) and netting them. The unit explicitly ignores the indirect method — the reconciliation that starts from net income and adds back depreciation. So you never start from profit, and depreciation appears nowhere on the statement.
Why doesn’t depreciation appear on the cash flow statement?
Because it is a non-cash expense: recording depreciation moves no cash. The cash left the business earlier, when the asset was bought (an investing outflow then). Under the direct method shown in this unit, you list only actual cash movements, so the depreciation figure is simply absent — you do not add it back. Adding it back is an indirect-method step, which BUSS1030 excludes.
Why does a profitable business run out of cash?
Because net income is accrual and cash is, well, cash. Three structural reasons open the gap: revenue earned on credit counts in profit now but the cash arrives later (receivables rise); expenses incurred on credit count in profit now but are paid later; and non-cash expenses like depreciation reduce profit without using cash. On top of that, investing and financing flows (buying equipment, repaying a loan, drawings) drain cash without touching operating profit.
How do I work out cash received from customers?
Start from sales revenue and adjust for the change in accounts receivable: cash from customers = sales revenue − increase in accounts receivable (or + a decrease). If receivables rose over the period, the business collected less cash than it earned in sales, so cash from customers is below sales revenue. The same logic — adjust the accrual figure for the change in the related working-capital account — gives cash paid to suppliers and employees.
Exam move
Anchor on the scope flag: direct method only, depreciation appears nowhere, never add it back. Practise the three-bucket classification until it is instant (customers/suppliers/employees = operating; buy/sell non-current assets = investing; owners and lenders = financing), because getting the classification right is half the marks. Build the operating section by listing real receipts and payments, deriving cash from customers from sales ± the change in receivables. Always finish with the closing-cash tie-back — opening cash + net change = closing cash = the balance-sheet cash figure — because a mismatch means a flow was mis-classified or missed. And read the story: positive operating cash with an overall cash dip is usually a financing choice (drawings, loan repayment), not a trading problem.
