Lesson 3 of 5 · 3 min · Reports
The cash flow statement
Where the cash actually came from, and where it went.
Profit and cash are not the same thing. The cash flow statement starts from profit and fixes every line where money and accounting part ways.
Lemon Co made $1.5 million of profit. Add back the $0.8 million of depreciation, since that cost used no cash this year. Take off $0.1 million tied up in extra lemons in stock.
That leaves $2.2 million of cash from operations. Then comes investing: Lemon Co spent $1 million on new stands. What is left, $1.2 million, is the free cash flow from that lesson.
The last part, financing, shows what the company did with lenders and owners: borrowing, repaying, dividends, buybacks. Free cash flow is what pays for all of those.
The warning sign: profit that rises every year while cash from operations does not. Then the profit is stuck somewhere, often in unpaid customer bills or unsold stock.
Quick question
Why does depreciation get added back in the cash flow statement?
- It is a cost that used no cash this year
- It is extra income
- It is paid to shareholders
Show the answer
It is a cost that used no cash this year
The cash left when the stand was bought. Depreciation spreads that old cost over the years, so it lowers profit but not this year’s cash.
Keep this one
Profit is claimed. Cash is counted.
Where this comes from
Standard layout of the cash flow statement: operating, investing, financing. Lemon Co’s figures are invented for teaching and match the free cash flow lesson.