The short answer
The cash flow statement explains why cash changed during the year, in three parts: operating activities (the business itself), investing activities (buying and selling long-term assets) and financing activities (borrowing, repaying and paying owners). It ends at the cash figure on the balance sheet.
Example Trades Ltd.
Statement of Cash Flows
For the year ended December 31, 2025
| Note | 2025 | |
|---|---|---|
| Operating activities | ||
| Net income | 87,000 | |
| Amortization (not a cash cost)1 | 42,000 | |
| Increase in accounts receivable2 | (41,000) | |
| Increase in inventory | (9,000) | |
| Increase in prepaid expenses | (1,000) | |
| Increase in accounts payable | 8,000 | |
| Increase in income taxes payable | 2,000 | |
| Cash from operating activities | 88,000 | |
| Investing activities | ||
| Purchase of equipment | (60,000) | |
| Cash used in investing activities | (60,000) | |
| Financing activities | ||
| Proceeds of long-term debt | 20,000 | |
| Repayment of long-term debt | (28,000) | |
| Dividends paid | (8,000) | |
| Cash used in financing activities | (16,000) | |
| Increase in cash | 12,000 | |
| Cash, beginning of year | 52,000 | |
| Cash, end of year3 | 64,000 | |
- 1Amortization is added back because it reduced net income without any cash leaving.
- 2Slow-paying customers cost $41,000 of cash. That is the receivables increase on the balance sheet, turned into a cash effect.
- 3It ties. $64,000 is the cash on the balance sheet. If a cash flow statement does not end at the balance-sheet cash figure, something is wrong.
How to read it
- Is operating cash flow positive, and close to net income? Here $88,000 against $87,000 of profit: healthy, even after the receivables drag.
- Is investing paid for by operations? $60,000 of equipment against $88,000 from operations: yes.
- What is financing doing? Net repayment of debt and a modest dividend. The business is reducing its borrowing, not depending on it.
If it is missing
Not every set of compiled statements includes a cash flow statement. If yours does not, you can build a rough one from two years of balance sheets and the income statement, using exactly the steps above.