Part 4 · Cash flow statement: money that actually hit the bank account · Lesson 18
The cash flow statement is the real bank record
Just because you made a profit does not mean that much cash arrived in your account. Learn to read the cash flow statement, the table that records only the money that actually came in and went out.
QToday's question
Robin Bakery earned KRW 1.2 billion, so why did its bank balance grow by only KRW 400 million?
The income statement shows net income of KRW 1.2 billion, but the money in the company's account grew by only KRW 400 million over the year. Did someone siphon off the cash? No. Profit is 'money recognized as earned' while the bank account is 'money that actually came in and went out', so the two are bound to differ. In this lesson, you will read from scratch the cash flow statement, the table that records that difference.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 1 of this course, you saw a diagram showing that the five financial statements are linked, and that the closing cash on the cash flow statement equals the cash on the balance sheet. In Lesson 6 you learned that the balance sheet is a 'photo' of one particular date, and in Lesson 7 that trade receivables (unpaid sales) and inventory take time to turn into cash. Recall the income statement staircase from Lesson 12 and 'earnings quality' from Lesson 15 as well. Today's table checks whether that profit actually turned into cash.
- STEP 1 · Basic conceptsWhy do profit and cash differ?
Explain, using a credit-sale example, why profit differs from actual cash.
- STEP 2 · Understanding the principleThe profit account and the cash account
Distinguish how credit sales, inventory, depreciation, equipment purchases, and loans move profit and cash differently, and understand the difference between the direct method and the .
- STEP 3 · Real-world applicationRobin Bakery's cash flow statement and DART
You can read the structure that runs from opening cash through three sections to closing cash, and find the consolidated cash flow statement on DART.
STEP 1Why do profit and cash differ?
The amount on a pay slip and your bank balance are not always the same. Companies are no different. Start by separating what 'profit' and 'cash' each count.
Profit is 'money recognized', cash is 'money received'
The income statement is written on an . Regardless of whether money actually changes hands, revenue is recognized at the moment the goods are delivered and the work is done, and the costs incurred for that revenue are recorded in the same period. This approach is right for fairly measuring how well a company did business over a year, because comparison would be hard if results swung with the date cash came in.
The problem is that profit recognized this way is not immediately money in the bank. Say that at the end of December the fictional Robin Bakery sold 100 cakes on credit to a regular café at KRW 50,000 each. The income statement books KRW 5 million of sales right away and profit rises, but not a single won has reached the bank account. Instead, the balance sheet gets KRW 5 million of , money owed to you. It only becomes cash when the café pays in January.
So the financial statements have one more table that records only the money that actually came in and went out. That is the . If the income statement is the 'business report card', the cash flow statement is the year's 'bank account record'. Like the income statement, it records a period of one year rather than a single day, while the cash on the balance sheet is the balance on the day that record ends.
The bank record is divided into three sections
The cash flow statement splits money movements into three groups by reason. Money from the core business of selling bread, buying ingredients, and paying wages is ; money from buying and selling long-lived assets such as ovens and stores is ; and money from borrowing and repaying, paying dividends to shareholders, and issuing new shares is . The sum of the three is the cash that rose or fell during the year, and adding it to the opening balance gives the year-end balance.
The answer to today's question is here too. Robin Bakery's net income is KRW 1.2 billion, but the cash that came in from the core business was KRW 1.8 billion, of which KRW 1 billion was spent on investments such as ovens and equipment and KRW 400 million on dividends and debt repayment. So only KRW 400 million was left in the account. The money did not disappear; it moved elsewhere.
Quick checkIn December, Robin Bakery sold cakes on credit for KRW 5 million of revenue and collected the money the following January. How does this appear on this year's income statement and this year's cash flow statement?
STEP 2The profit account and the cash account
The same transaction can move profit and cash differently. If you set up two accounts and put in the transactions one by one, you can see right away where the difference comes from.
See it in a picture: one transaction, two accounts
Press the buttons below to trigger transactions at Robin Bakery (fictional) one at a time. The top bar is the 'profit account' that builds up on the income statement, and the bottom bar is the 'cash account' that builds up on the cash flow statement. Look for cases where, for the same transaction, only one moves or they move in opposite directions.
- TransactionProfitCash
Press a button to add a transaction. Amounts are in units of KRW 10,000.
These are simplified transactions of a fictional company (in units of KRW 10,000). Only revenue is reflected for the credit sale, excluding its cost of sales and taxes, and the oven is assumed to cost KRW 10 million and be used for 10 years.
Five things that pull profit and cash apart
The figure shows five main differences. First, a credit sale books profit first and brings in cash later. The more receivables grow, the less cash there is relative to profit. Second, an inventory purchase sends cash out first, but ingredients not yet sold stay as rather than an expense, so profit is unchanged. Third, an equipment purchase also sends out cash all at once, but it is booked as an asset, not an expense.
Fourth, the cost of that equipment is converted into expense over the years you use it, and this is the you saw in Lesson 7. Depreciation reduces profit but no cash leaves that year, because the money already went out when the equipment was bought. Such expenses are called . Robin Bakery has KRW 1 billion of depreciation inside cost of sales and SG&A, so that much more cash came in than profit. Fifth, borrowing, repaying, and dividends are not business performance, so they do not affect profit, but they move cash significantly.
Direct method and indirect method
There are two ways to present cash flow from operating activities. The direct method lists actual cash inflows and outflows by item, such as cash received from customers and cash paid to suppliers. The starts from net income, adds back expenses that did not use cash such as depreciation, and subtracts amounts where cash is tied up such as growth in credit sales and inventory. Accounting standards (K-IFRS 1007) allow either and encourage the direct method, but in listed companies' reports the indirect method is far more common. The indirect method shows line by line 'why net income differs from cash', so it actually gives investors more to read. In the next lesson we will cross this bridge one step at a time.
Common misconceptions
- "A big net income means the company has lots of cash?"
- No. When receivables and inventory pile up, the bank account can run dry even with large profits. Conversely, even in a loss-making year, cash can come in if depreciation is large.
- "Cash fell, so the business must be doing badly?"
- Not necessarily. If, like Robin Bakery, a company spends the money earned from its core business on equipment investment and dividends, year-end cash does not grow much even though business went well. You need to look at which section it fell in.
- "Depreciation doesn't use cash, so I can ignore it?"
- No. Depreciation spreads out money already spent in the past to buy equipment. Equipment will need to be bought again someday, so on the cash flow statement it should be viewed together with equipment purchases under investing activities (free cash flow in Lesson 20).
Quick checkRobin Bakery bought a new KRW 20 million oven with cash. What happens to this year's profit on the income statement and to cash on the cash flow statement? (Assume the oven is used for 10 years.)
STEP 3Robin Bakery's cash flow statement and DART
Now let's lay out Robin Bakery's year of bank records on one page. Follow the path from KRW 400 million at the start of the year through three sections to KRW 800 million at year-end.
See it in a picture: from KRW 400 million opening to KRW 800 million closing
Press a bar or a button below. It shows what money is in each section.
This is the cash flow of the fictional company Robin Bakery for one year (Year 3). Operating activities are reconciled using the indirect method, starting from net income.
The order for reading the numbers is simple. First, check whether operating activities are positive, because that means the company is earning cash from its core business. Robin Bakery took in KRW 1.8 billion, more than its KRW 1.2 billion of net income. Next, see where that money was spent. KRW 1 billion went to equipment such as ovens and stores and to intangible assets, KRW 300 million to dividends, and KRW 100 million to repaying debt. The remaining KRW 400 million built up in the account to make year-end cash of KRW 800 million, which matches exactly the 'cash and cash equivalents of KRW 800 million' on the balance sheet from Lesson 6.
Finding it yourself on DART: the consolidated cash flow statement
Open the annual report you looked at in Lesson 3 again. The screen below is the consolidated cash flow statement from the annual report of a large listed company (filed 2025.03.11, 2024 results). It is only an example of how to find your way around, not an investment recommendation.
1234- 1In the table of contents, open III. Financial Matters → 2. Consolidated Financial Statements → 2-5. Consolidated Cash Flow Statement.
- 2Check the unit. This table is in millions of won, so 72,982,621 is about KRW 73 trillion.
- 3Look at the total cash flow from operating activities. In 2024 it was about KRW 73.0 trillion, more than twice the same year's net income (about KRW 34.5 trillion). That is because it is a company with large non-cash expenses such as depreciation.
- 4Scroll down to check cash flow from investing activities (about −KRW 85.4 trillion) and cash flow from financing activities (about −KRW 7.8 trillion), and verify that closing cash and cash equivalents at the bottom (about KRW 53.7 trillion) match the cash on the balance sheet.
Source: FSS DART, Samsung Electronics annual report (filed 2025.03.11, rcpNo 20250311001085), screen of III-2-5 Consolidated Cash Flow Statement, captured 2026-10-08. This is a navigation example and not a stock recommendation.
The actual table has one more line besides the three sections. It is 'effect of foreign currency translation on cash', which arises when foreign-currency cash held overseas, such as dollars, is converted into won. For this company in 2024, that line was about KRW 4.8 trillion, and the cash decrease of about KRW 15.4 trillion including the three sections and this line turned opening cash of about KRW 69.1 trillion into closing cash of about KRW 53.7 trillion. The closing figure of KRW 53,705,579 million is the same number as the cash and cash equivalents on the consolidated balance sheet of the same report.
How to use it in investing
| When you see numbers like this | Try reading them like this |
|---|---|
| Net income is positive but operating cash flow is negative | Check the balance sheet for built-up receivables (unpaid sales) and inventory. If it lasts several years rather than one, it is a warning sign (Lesson 21) |
| Operating cash flow is consistently larger than net income | Common in equipment-heavy industries with large depreciation. Equipment purchases under investing activities are large too, so look at them together (Lesson 20) |
| Year-end cash dropped sharply | Check which section it dropped in. The meaning is the opposite depending on whether it was equipment investment or dividends, or the core business being negative |
| Year-end cash rose sharply | Check whether it was earned from the core business or came in from borrowing or issuing new shares (financing activities) |
That is not always the case. The cash flow statement is based on the balance on the last day of the year, so collecting receivables in a rush or delaying payments at year-end can make a year's numbers look good. Look at several years together and read them alongside the income statement and balance sheet. This lesson does not recommend buying or selling any particular stock.
Quick checkIn one year Robin Bakery had operating activities of +KRW 1.8 billion, investing activities of −KRW 1 billion and financing activities of +KRW 600 million (newly borrowed money). Starting from opening cash of KRW 400 million, what is closing cash?
✓What we learned today
- The income statement records money recognized as earned (accrual basis), while the cash flow statement records money that actually came in and went out. That is why net income and the change in cash are almost always different.
- A credit sale raises profit first and cash later. Inventory purchases and equipment purchases reduce cash first, and depreciation reduces only profit, without any cash.
- The cash flow statement is divided into three sections, operating, investing and financing, and opening cash + the sum of the three sections = closing cash. For Robin Bakery (fictional), KRW 400 million + KRW 1.8 billion − KRW 1 billion − KRW 400 million = KRW 800 million.
- The closing cash on the cash flow statement is the same number as cash and cash equivalents on the balance sheet for the same date. You can check the two numbers against each other in real reports too.
- On DART, it is in the annual report under III. Financial Matters → 2. Consolidated Financial Statements → Consolidated Cash Flow Statement.
What does each of the three sections of the cash flow statement contain? In the next lesson, you will cross the bridge from KRW 1.2 billion of net income to KRW 1.8 billion of operating cash one step at a time, and learn to guess a company's character from just the +/− signs of the three sections.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Robin Bakery sold cakes on credit for KRW 5 million of revenue. If it has not yet received the money, what happens?
The income statement recognizes revenue the moment the goods are delivered (accrual basis), so profit rises. Cash arrives only when the money is received, and until then it stays as trade receivables.
Q2. Which of the following is an expense that lowers profit but does not use cash in that year?
Depreciation turns the price of equipment already bought into an expense over the years it is used, so no cash leaves in that year. That is why it is called a non-cash expense.
Q3. Robin Bakery (fictional) has opening cash of KRW 400 million, operating activities of +KRW 1.8 billion, investing activities of −KRW 1 billion and financing activities of −KRW 400 million. What is closing cash?
KRW 400 million + KRW 1.8 billion − KRW 1 billion − KRW 400 million = KRW 800 million. This number equals the KRW 800 million of cash and cash equivalents on the balance sheet of the same date.
Q4. You borrowed KRW 100 million from a bank. Where does this transaction appear?
Borrowing and repaying money is not a result of doing business, so it does not affect profit, and it goes into financing activities on the cash flow statement. On the balance sheet, a liability called borrowings increases.
Q5. Which method starts from net income, adds back non-cash expenses, and subtracts increases in receivables and inventory to arrive at cash flow from operating activities?
It is the indirect method. The accounting standard encourages the direct method, but actual reports commonly use the indirect method, which shows line by line why net income differs from cash.
NextTerms · Next lesson · Related tools
A table showing the cash that actually came in and went out through operating, investing and financing activities over a period. Closing cash equals cash and cash equivalents on the balance sheet.
Accrual basisAccrual basisThe principle of recording revenue and expenses when a transaction occurs rather than when money actually changes hands. The income statement uses this approach, so even a credit sale is booked as revenue the moment the goods are delivered.
Cash flow from operating activitiesCash flow from operating activitiesThe cash that actually came in and went out from the core business, such as selling products and paying for materials, wages and taxes. Whether it is consistently positive is the basic check on a company's strength.
Cash flow from investing activitiesCash flow from investing activitiesCash from buying and selling assets held for the long term or invested in, such as equipment, intangible assets, stakes in other companies and financial instruments. Equipment purchases are checked separately on the 'acquisition of property, plant and equipment' line.
Cash flow from financing activitiesCash flow from financing activitiesCash from activities that change equity and borrowings, such as borrowing and repaying money, issuing shares and paying dividends.
Indirect / direct methodIndirect / direct methodTwo ways to report cash flow from operating activities. The direct method lists cash inflows and outflows by item, while the indirect method starts from net income, adds back non-cash expenses and reflects changes in working capital. The accounting standard encourages the direct method, but the indirect method is common in actual reports.
Non-cash expenseNon-cash expenseAn expense that is deducted when calculating profit but does not use cash in that year. Depreciation is the classic example, so under the indirect method it is added back to net income.
Trade receivablesTrade receivablesMoney owed for goods or services already sold but not yet received. If it grows much faster than sales, it can be a sign the company isn't getting paid.
InventoriesInventoriesRaw materials, work in progress and finished goods held for sale. They become cash only once they are sold and collected.
DepreciationDepreciationSpreading the purchase price of equipment over its years of use and expensing it each year. It is an expense for which no cash goes out that year.
Cash and cash equivalentsCash and cash equivalentsCash and deposits that can be turned into cash right away. It equals the ending cash on the cash flow statement.
Balance sheetBalance sheetA table showing what a company owns on a particular day (usually the end of the fiscal year) and the sources of the money that paid for those assets, liabilities and equity. Assets = liabilities + equity always holds.
Income statementIncome statementA table showing revenue and expenses over a period and the resulting profit. Under K-IFRS, it also includes other comprehensive income and is called the statement of comprehensive income.
Put what you learned to use right away
Reading Financial Statements · The income statement is a year-long report card→Earnings calendar→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.