Where the cash actually went
The cash flow statement closes the gap between earnings and cash. It starts from net income (top of the income statement waterfall) and adjusts for everything that's accrual-but-not-cash, ending at the actual change in cash for the period.
It's split into three sections — operating, investing, financing — that together explain every movement of cash:
1. Operating cash flow (CFO) — cash from running the business
Starts from net income, adjusts back the non-cash items:
- Add back depreciation and amortization (non-cash expenses)
- Add back stock-based compensation (non-cash payment to employees)
- Adjust for changes in working capital (more receivables = less cash collected; more payables = more cash retained)
The result is the cash actually generated by the core business operations during the period. This is the most important section — it's the engine. A company with consistently strong CFO is healthy; one with negative CFO is burning cash from operations.
2. Investing cash flow (CFI) — cash spent on or received from long-term assets
Big one here is capital expenditures (CapEx) — money spent on PP&E, like building factories or buying equipment. Almost always negative for growing companies (they're investing). Also includes acquisitions, divestitures, and changes in long-term investments.
For mature companies, CFI ≈ −CapEx (most other items net out). For growing companies, CFI can be very negative as they expand.
3. Financing cash flow (CFF) — cash from / to investors and lenders
Where the company gets external financing — and where it returns money to investors:
- Issuing stock (cash in)
- Repurchasing stock / buybacks (cash out)
- Issuing debt (cash in)
- Repaying debt (cash out)
- Paying dividends (cash out)
A company growing rapidly often has positive CFF (they're raising capital). A mature company with steady operations often has negative CFF (paying dividends, buying back stock, paying down debt).
The bridge — why net income ≠ cash
Walk through a simple example. Suppose net income is ₩100. The income statement subtracted ₩30 of depreciation as an expense. But depreciation isn't a cash expense — it's an accounting allocation of past CapEx. So we add it back: cash from net income alone is ₩100 + ₩30 = ₩130.
Now suppose accounts receivable went up ₩20 over the period (customers haven't paid yet). That ₩20 of revenue is in net income but the cash hasn't arrived. Subtract it: ₩130 − ₩20 = ₩110 of operating cash flow.
That's all the cash flow statement is doing — adjusting reported earnings to get to actual cash.
The bottom line: net change in cash
CFO + CFI + CFF = net change in cash for the period. That number ties to the balance sheet — starting cash + this number = ending cash. The whole statement reconciles back.
The takeaway
Cash flow statement explains why earnings ≠ cash. Three sections: operating (the engine), investing (CapEx and acquisitions), financing (raising/returning capital). Operating cash flow is the most important — it's where cash from the actual business comes from. Their sum equals the change in cash, which reconciles to the balance sheet. Free cash flow (next lesson + lesson 5-6) is built largely from operating cash flow minus CapEx.