Part 4 · The cash flow statement: money that actually hit the bank account · Lesson 19
Reading operating, investing, and financing activities in three columns
Just from the numbers and signs in the three boxes (operating, investing, financing), you can guess what phase a company is going through.
QToday's question
Operating +18, investing −10, financing −4. Can you guess a company's character from the signs of just these three numbers?
From just a few readings on a health checkup report, you can tell 'this person has been overdoing it lately' or 'they're in recovery'. The cash flow statement works the same way. Just seeing whether the three boxes are positive or negative shows whether the company is earning money and investing, or surviving on borrowed money. In this lesson we open the three boxes one by one and practice reading a company from its sign pattern.
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 18 you learned that the cash flow statement is a year of bank account records, and that opening cash + the three boxes = closing cash. Today we open those three boxes one by one. Net income, the starting point, was in the income statement of Lesson 12; depreciation, receivables and inventory in Lesson 7; borrowings and advances received in Lesson 8; and dividends and retained earnings in Lesson 9.
- STEP 1 · Basic conceptsThe money held in the three boxes
You will be able to tell what money goes into , and activities.
- STEP 2 · Understanding the mechanicsThe bridge from net income to operating cash flow
You will be able to use the to add to net income and reflect changes in to arrive at operating cash flow.
- STEP 3 · Real-world applicationReading a company from its sign pattern
You will be able to guess the from the +/− combination of the three boxes, and confirm that combination in a real report.
STEP 1The money held in the three boxes
A household budget is easy to take in at a glance if you record 'salary and living expenses', 'buying a home or car', and 'loans and repayments' separately. The three boxes of the cash flow statement are likewise divided by the reason money moved.
The three boxes set by accounting standards
The accounting standard (K-IFRS 1007) divides cash flows into three kinds of activities. are the company's main revenue-producing activities, plus anything that is neither investing nor financing. Money received from selling bread, and money paid out for ingredients, salaries and taxes, go here. are buying and selling long-lived assets and investment assets that are not cash equivalents. Property, plant and equipment such as ovens and stores, intangible assets such as software, stakes in other companies, and long-term deposits or financial products go here. change the size or composition of the capital and borrowings the company has raised. Borrowing and repaying money, issuing new shares, and paying dividends are typical examples.
| Box | Robin Bakery (fictional) line items | Amount (KRW 100 million) |
|---|---|---|
| Operating activities | The result of selling bread, cakes and coffee and paying for ingredients, labor and taxes | +18 |
| Investing activities | Purchase of oven and store equipment −8, intangible assets etc. −2 | −10 |
| Financing activities | Dividends paid −3, repayment of borrowings −1 | −4 |
| Total | Cash increase over the year (opening 4 → closing 8) | +4 |
Interest and dividends sit in different places at different companies
Some items are confusing. The accounting standard lets each company decide whether interest received and paid, and dividends received and paid, go under operating or under investing/financing activities, and requires it to follow the same approach every year. For example, one company reports interest paid under operating activities and another under financing activities. So when comparing two companies' operating cash flow, it is a good idea to first check which box holds interest, dividends and income taxes. For Robin Bakery, we will assume interest paid is reported in operating activities and dividends paid in financing activities.
Quick checkWhich box does each of these go in? (A) The construction cost of a new store's interior (B) Dividends paid to shareholders (Robin Bakery's classification) (C) Payment received from a customer for cakes
STEP 2The bridge from net income to operating cash flow
Robin Bakery's net income is KRW 1.2 billion, but its operating cash was KRW 1.8 billion. Where did the extra KRW 600 million come from? Let's cross the bridge using the indirect method, which most real reports use.
Two adjustments, adding and subtracting
The starts from net income and corrects two things. First, it adds back , which were deducted when calculating profit but did not take cash out that year. The classic example is depreciation. Robin Bakery has KRW 1 billion of depreciation in total, KRW 800 million in cost of sales and KRW 200 million in SG&A, so it adds back KRW 1 billion.
Second, it reflects changes in money tied up or released by running the business, that is, . You only need to remember one rule. When assets rise, cash falls; when liabilities rise, cash rises. A rise in credit sales owed to you () means more money was booked as revenue but not yet collected, so it is subtracted from cash. A rise in warehouse inventory means money was spent in advance to buy ingredients, so it is subtracted too. Conversely, if money owed to suppliers () or cake reservation deposits received in advance () rise, the money has not yet been paid or has been received early, so it is added to cash.
See it in a chart: the operating cash flow bridge
Change the scenario with the buttons below. They show how operating cash changes with the same net income when receivables suddenly rise or inventory is stocked up in advance.
These are the year-3 numbers of the fictional Robin Bakery. The scenario buttons are hypothetical calculations that change just one thing with everything else held equal. Net income is KRW 1.2 billion in every scenario.
As the chart shows, even with the same net income, operating cash can be KRW 800 million or KRW 2.1 billion. That is why investors often look at operating cash flow divided by net income. Robin Bakery's is 18 ÷ 12 = 1.5x, meaning more cash came in than profit earned. If this ratio stays well below 1x for several years, profit is not turning into cash, which we revisit as 'earnings quality' in Lesson 22.
Common misconceptions
- "Depreciation gets added back, so the more depreciation, the better the company?"
- No. Depreciation is money already spent in the past on buying equipment. Operating cash looks larger, but a company that must keep buying new equipment will pay it out again in investing activities. You have to look at both boxes together.
- "More trade payables means more cash, so it's always good?"
- It means paying suppliers later, so cash rises for now, but the money must be repaid eventually. If it jumps sharply in just one year, check with the following year whether payments were pushed back at year-end.
- "If operating cash flow is positive, there is nothing to worry about?"
- It is only a good starting point showing that the core business earns cash. If capital spending, interest and dividends keep exceeding that cash, the gap eventually has to be filled by borrowing. The sign pattern in the next STEP shows the whole picture.
Quick checkIn one year, Robin Bakery had net income of KRW 1.2 billion, depreciation of KRW 1 billion, a receivables increase of KRW 500 million, an inventory decrease of KRW 200 million and a trade payables increase of KRW 100 million. What is operating cash flow? (Assume there are no other items.)
STEP 3Reading a company from its sign pattern
If you only ask whether each box is positive (+, money coming in) or negative (−, money going out), there are eight combinations. Each combination has a company profile that commonly comes to mind.
See it in a chart: sign pattern explorer
Tap the sign of each box to change it, or tap one of the example buttons below. A type card matching the combination appears. The type names are general interpretations commonly used by investors, not classifications set by accounting standards.
Robin Bakery and Dark Cloud Electronics are fictional companies. The real large listed company example uses the 2024 figures from the same report as the DART screen below. The type names are general interpretations, and the same combination can mean different things depending on the industry and period.
Robin Bakery is +/−/−. It invests in equipment with money earned from its core business, repays a little debt, and even pays dividends. This is the most welcome pattern for a mature company. Dark Cloud Electronics (fictional) was said to have earned KRW 300 million of net income in year 3, but its operating activities were −KRW 2.2 billion. Receivables and inventory ballooned so the core business actually soaked up cash, and the hole was plugged with KRW 2 billion of convertible bonds and KRW 500 million of short-term borrowings. Its signs are −/−/+. That pattern is common for a growth company that has just started, but when a company that claims three straight years of profit looks like this, it is a warning sign that profit and cash are moving apart (Lesson 21).
Finding it yourself on DART: the bridge and the three boxes
This time, read the consolidated cash flow statement you opened in Lesson 18 line by line from the top. This is only an example of finding your way around, not an investment recommendation.
12345- 1Total cash flows from operating activities: 2024, KRW 72,982,621 million (about KRW 73.0 trillion).
- 2Net income, the starting point of the bridge: KRW 34,451,351 million (about KRW 34.5 trillion).
- 3Adjustments: the line that reverses non-cash expenses such as depreciation, and items reported separately such as interest and income taxes (about KRW 42.9 trillion). The breakdown is in Note 27.
- 4Changes in assets and liabilities from operating activities: the change in working capital (about −KRW 1.6 trillion). The more receivables and inventory rise, the larger the negative.
- 5Total cash flows from investing activities (about −KRW 85.4 trillion). Further down are financing activities and closing cash.
Source: FSS DART, Samsung Electronics annual report (filed 2025.03.11, rcpNo 20250311001085) III-2-5 Consolidated Cash Flow Statement, checked 2026-10-08. This company reports interest received and paid, dividend income and income taxes paid under operating activities, and dividends paid under financing activities. This is an example of finding your way around, not a stock recommendation.
Summarizing three years from the same statement by sign gives the table below. All three years are +/−/−. Even in 2023, when net income fell sharply, operating cash was about 2.8 times net income, a feature of capital-intensive industries with heavy depreciation.
| Year | Net income | Operating | Investing | Financing | Signs |
|---|---|---|---|---|---|
| 2024 | 34.5 | +73.0 | −85.4 | −7.8 | +/−/− |
| 2023 | 15.5 | +44.1 | −16.9 | −8.6 | +/−/− |
| 2022 | 55.7 | +62.2 | −31.6 | −19.4 | +/−/− |
Unit: KRW trillion (raw data in KRW millions, rounded). Source: consolidated cash flow statement of the same report as above, checked 2026-10-08.
There is one more point to note. Not all of the −KRW 85.4 trillion of investing activities in 2024 went into factory equipment. The same box contains roughly −KRW 51.4 trillion for acquisition of property, plant and equipment and roughly −KRW 33.0 trillion for moving spare cash into short-term financial instruments, such as time deposits with maturities over three months. Conversely, in 2023 the company cut short-term financial instruments by about KRW 39.4 trillion and turned them back into cash. This is why you should not automatically read a large negative in investing as 'investing aggressively in equipment', and should check the acquisition of property, plant and equipment line separately. That line becomes the raw material for free cash flow in the next lesson.
How to use it in investing
| When you see this pattern | Check it like this |
|---|---|
| +/−/− continues for several years | The core business covers investment and shareholder returns. Check whether operating cash is consistently larger than capital spending (Lesson 20, FCF) |
| It changed to +/−/+ | Investing heavily with borrowed money on top of earned money. Check what is being invested in, the scale of borrowing, and the interest coverage ratio (Lesson 10) |
| −/−/+ or −/+/+ while net income is positive | Profit is not turning into cash. Check increases in receivables and inventory, and convertible bond and paid-in capital increase disclosures (Lessons 21 and 31) |
| Investing turned positive | Check the detailed lines to see whether equipment or stakes were sold, or financial instruments were turned back into cash |
Not always. A sign pattern is only the shape of a single year, and for a new biotech or platform company, −/−/+ can be a normal part of growth. Always look at several years and the industry's characteristics together, and compare the size of the amounts too. This lesson does not recommend buying or selling any particular stock.
Quick checkA company's cash flows were operating +KRW 5 billion, investing +KRW 3 billion (sale of a factory) and financing −KRW 7 billion (repayment of borrowings). What are the sign pattern and its common interpretation?
✓What we learned today
- Operating activities are money from the core business, investing activities are money from buying and selling assets such as equipment, stakes and financial products, and financing activities are money from borrowing, repaying, paying dividends and issuing shares.
- Under the indirect method, net income + non-cash expenses (depreciation etc.) − increase in working capital = operating cash flow. For Robin Bakery (fictional), 12 + 10 − 4 = KRW 1.8 billion (units: KRW 100 million).
- When assets such as receivables and inventory rise, cash is tied up; when liabilities such as trade payables and advances received rise, cash is left over.
- The sign pattern +/−/− is the strong type that earns from its core business, invests, repays debt and pays dividends, while −/−/+ or −/+/+ is a pattern where the core business fails to earn cash and the gap is covered by borrowing or selling. However, a pattern is only a starting point, and you must consider the industry and period too.
- Investing activities in a real report include not only equipment but also movements in deposits and financial products, so check the acquisition of property, plant and equipment line separately.
Robin Bakery earned KRW 1.8 billion from its core business and spent KRW 800 million on equipment. So how much money can the company freely use? The next lesson calculates free cash flow (FCF), the money that actually remains, and looks at the sources for dividends and debt repayment.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Which box of the cash flow statement does cash spent on buying oven and store equipment go in?
Money for buying and selling long-lived tangible assets is investing activities. In real reports, it appears as the 'acquisition of property, plant and equipment' line.
Q2. Why is depreciation added back to net income under the indirect method?
Depreciation spreads the cost of equipment already bought as an expense, so no cash goes out that year. So the amount deducted from profit is added back to put it on a cash basis.
Q3. If net income is the same but trade receivables (credit sales) rise sharply, what happens to operating cash flow?
More money was booked as revenue but not yet received, so that much less cash came in. When assets rise, cash falls.
Q4. How is Robin Bakery's (fictional) operating +18, investing −10, financing −4 commonly read?
+/−/− is a pattern where cash earned from the core business covers investment, dividends and debt repayment. It is a welcome combination for a mature company.
Q5. When investing activities in a real report are heavily negative, which line should you always check alongside?
Investing activities include not only equipment purchases but also money moved into deposits and financial products. Look at the acquisition of property, plant and equipment line separately to know the actual scale of capital spending.
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.
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.
Working capitalWorking capitalMoney tied up in running the business. When receivables and inventory rise, cash gets tied up; when trade payables and advances received rise, cash is freed. In the cash flow statement, it appears as "changes in operating assets and liabilities."
Cash flow sign patternCash flow sign patternThe combination of whether each of the three boxes (operating, investing, financing) is positive or negative. +/−/− is commonly read as the strong type, and −/−/+ as an early-investment type or a warning sign, but these are general interpretations that must be combined with the industry and period.
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.
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.
Advances receivedAdvances receivedMoney received in advance before delivering goods or services. It is recorded as a liability because it is an obligation to deliver, and turns into revenue when delivered. In order-based industries, it is read as a signal of future sales.
Trade payablesTrade payablesThe amount owed for raw materials or goods bought on credit and not yet paid. It is normally an operating liability that carries no interest.
Capital expenditureCapital expenditureMoney a company spends to buy production assets such as factories, machinery and equipment. It becomes revenue for equipment and construction companies and increases future production capacity.
BorrowingsBorrowingsMoney borrowed from financial institutions such as banks. What is due within one year is recorded as short-term borrowings (current liabilities), and what is due later as long-term borrowings (non-current liabilities).
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