# The cash flow statement

> Northwind earned $2,550 and its operations consumed $3,100. The third statement is the one that explains the difference, line by line.

Source: https://lopifi.com/learn/the-cash-flow-statement
Part of: Lopifi — US GAAP books on autopilot, reviewed by a CPA (https://lopifi.com)

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**Why is a profitable company short of cash?** Northwind earned $2,550 and its operations consumed $3,100. The third statement is the one that explains the difference, line by line.

Two statements in, and one question is still unanswered: the bank has $32,900 and the profit was $2,550, so where did the rest come from and where did it go? The [cash flow statement](https://lopifi.com/md/glossary/cash-flow-statement) answers it by starting at net income and undoing every place accrual accounting and cash disagree.

*[Cash flow statement]*

Northwind Traders, Inc. — for the month ended 30 September 2026. Indirect method.

*[Interactive figure: cash flow]*

Opening cash of zero, through operating ($3,100 out), investing ($24,000 out) and financing ($60,000 in), into the cash in the bank on 30 September.

— [ASC 230-10-45-10](https://asc.fasb.org/230/tableOfContent), Cash flows are classified as operating, investing or financing

## Reading the operating section

Three kinds of line show up between net income and operating cash. Non-cash expenses are added back — depreciation cost $500 of profit and moved no money. Increases in operating assets are subtracted — every dollar of receivable is revenue that has not arrived, every dollar of inventory or prepaid insurance is cash spent ahead of the expense. Increases in operating liabilities are added — the supplier, the unbilled utility and the customer's deposit are all, in effect, funding Northwind for free.

> **The whole lesson in one line.** Northwind is profitable and its operations consumed $3,100. Nothing is wrong: it bought stock, extended credit to a customer, and prepaid a year of insurance. That is what growth costs in [working capital](https://lopifi.com/md/glossary/working-capital), and the income statement is structurally incapable of telling you about it.

The other two sections are simpler. **Investing** is buying and selling long-lived assets and investments — the $24,000 van, a [capital expenditure](https://lopifi.com/md/glossary/capital-expenditure). **Financing** is cash from, or returned to, the owners and lenders who fund the business — the founders' $60,000. Sum the three and you must land exactly on the change in the bank balance, which in a first month is the balance itself.

The working-capital lines are not a stylistic choice either — the standard names the minimum set, and receivables, inventory and payables are all on it.

— [ASC 230-10-45-28, -45-29](https://asc.fasb.org/230/tableOfContent), The indirect method, and what it must separately report

## The same number, the direct way

There is a second way to present the operating section, and the standard encourages it: the *direct method* lists the operating cash that actually came in and went out. Almost nobody uses it, because the indirect walk falls straight out of the ledger. But it is the best proof that the indirect walk is not a trick — take every movement through the bank account except the van and the founders' money, and you land on the same (3,100).

| Entry | What happened | Cash |
| --- | --- | --- |
| JE-3 | Twelve months of insurance is paid up front: $7,200. | (7,200) |
| JE-5 | A walk-in customer buys $9,500 of goods and pays on the spot. | 9,500 |
| JE-9 | Northwind pays $12,000 against the supplier's bill. | (12,000) |
| JE-10 | The trade customer pays $14,000 of the September invoice. | 14,000 |
| JE-11 | September payroll of $8,400 is paid. (Kept simple: no withholding or payroll taxes.) | (8,400) |
| JE-12 | A customer pays a $3,000 deposit for goods to be delivered in October. | 3,000 |
| JE-13 | September rent of $2,000 is paid. | (2,000) |
|  | Net cash from operating activities | (3,100) |

Operating cash, direct method — every movement through 1000 Cash that was not investing or financing.

— [ASC 230-10-45-25; 230-10-50-2](https://asc.fasb.org/230/tableOfContent), The direct method is encouraged; an entity using the indirect method must disclose interest and income taxes paid

**Exercise — Walk $2,550 of profit to $32,900 in the bank.** Start at net income, add back what cost no cash, and take out what moved cash without touching profit. The walk is right when the total equals the change in the bank balance — and in a first month, the change is the balance. Type it in the workbook at https://lopifi.com/playground.

## What a founder reads off it

Operating cash less capital expenditure is [free cash flow](https://lopifi.com/md/glossary/free-cash-flow): (27,100) in September, almost all of it the van. It is not a GAAP measure — no standard defines it, and a public company that reports it has to reconcile it to one that is. [Runway](https://lopifi.com/md/glossary/runway) is the same kind of number: if operations kept consuming $3,100 a month, $32,900 would last about ten months. Both are only as honest as the cash flow statement they are read from.

> **Profit is an opinion about a period; cash is a fact about a bank account. A business fails when it runs out of the second, whatever the first says.**

**Check yourself.** October: Northwind collects the remaining $8,000 receivable but makes no new sales, while rent, payroll and the rest carry on. What does the collection do?

- Revenue of $8,000 and $8,000 of operating cash. — The revenue was earned in September. Recording it again on collection would count the sale twice.

- No revenue from the collection, and $8,000 of operating cash in — so October can show a loss and a cash inflow from customers at once. — Exactly the mirror image of September: profit and cash flow move in opposite directions, and both statements are right.

- No revenue and no cash effect. — Cash very much moves — a receivable becomes cash. It just never touches the income statement.

- **Lesson:** 12 of 13 — 12 min
- **Terms taught:** [Cash flow statement](https://lopifi.com/md/glossary/cash-flow-statement), [Working capital](https://lopifi.com/md/glossary/working-capital), [Net income](https://lopifi.com/md/glossary/net-income), [Depreciation](https://lopifi.com/md/glossary/depreciation), [Capital expenditure](https://lopifi.com/md/glossary/capital-expenditure), [Free cash flow](https://lopifi.com/md/glossary/free-cash-flow), [Runway](https://lopifi.com/md/glossary/runway)
- **Previous:** [The balance sheet](https://lopifi.com/md/learn/the-balance-sheet)
- **Next:** [Closing the month](https://lopifi.com/md/learn/closing-the-month)
- **The course:** https://lopifi.com/learn