What you'll learn
- Why profit and cash are not the same thing
- The three categories of cash flow: operating, investing and financing
- How to use the indirect method to find cash from operating activities
- How to lay out the Cash Flow Statement and reconcile the cash balance
- Which items are non-cash and must be adjusted for
- The traps that cost marks in the Grade 12 examination
1. Why a Cash Flow Statement matters
A company can show a healthy profit and still run out of cash. Profit is calculated on an accrual basis: income is recorded when it is earned and expenses when they are incurred, whether or not the cash has moved. The Cash Flow Statement records only actual movements of cash. It answers a simple question: where did the money come from, and where did it go?
A quick example shows why this matters. Suppose a business sells goods worth R100 000,00 on credit and the debtors have not paid by year end. The profit is recorded as earned, but no cash has come in. If the same business has already paid its suppliers and its wages, it may have a healthy profit on paper but an empty bank account. The Cash Flow Statement exposes this gap, which is exactly why banks and investors read it carefully before lending money or buying shares.
| Term | Meaning |
|---|---|
| Operating activities | Cash flows from the main trading activities of the business and interest and tax paid. |
| Investing activities | Cash flows from buying and selling non-current assets and other investments. |
| Financing activities | Cash flows from shares issued, loans raised or repaid, and dividends paid. |
| Cash and cash equivalents | Cash in the bank, cash float and short-term deposits, less bank overdraft. |
| Non-cash item | An expense or income that does not involve cash, such as depreciation. |
2. The format of the Cash Flow Statement
The Cash Flow Statement has three sections, then a reconciliation of the cash balance.
| Cash Flow Statement for the year ended ... | R |
|---|---|
| Cash flows from operating activities | |
| Cash generated from operations | xxx |
| Interest paid | (xxx) |
| Income tax paid | (xxx) |
| Net cash from operating activities | xxx |
| Cash flows from investing activities | |
| Purchase of non-current assets | (xxx) |
| Proceeds from sale of non-current assets | xxx |
| Net cash used in investing activities | (xxx) |
| Cash flows from financing activities | |
| Proceeds from shares issued | xxx |
| Loans raised or repaid | xxx/(xxx) |
| Dividends paid | (xxx) |
| Net cash from financing activities | xxx |
| Net change in cash and cash equivalents | xxx |
| Cash and cash equivalents at beginning of year | xxx |
| Cash and cash equivalents at end of year | xxx |
The indirect method starts with profit before tax and adjusts it for non-cash items and changes in working capital.
3. Worked example 1 — operating activities (indirect method)
Case: Sizolwethu Ltd for the year ended 31 December 2026.
You are given the following:
- Profit before tax: R500 000,00
- Depreciation: R80 000,00
- Finance cost (interest expense): R40 000,00
- Inventories increased by R30 000,00
- Trade receivables increased by R50 000,00
- Trade payables increased by R20 000,00
- Income tax paid: R120 000,00
Step 1 — Start with profit before tax and add back non-cash and finance items. Depreciation did not use cash, and interest is shown separately as interest paid, so both are added back: R500 000,00 + R80 000,00 + R40 000,00 = R620 000,00.
Step 2 — Adjust for working capital changes. More inventories and more debtors mean cash is tied up, so they are subtracted. More creditors means the business is keeping cash longer, so it is added: R620 000,00 − R30 000,00 − R50 000,00 + R20 000,00 = R560 000,00 cash generated from operations.
Step 3 — Deduct interest and tax paid: R560 000,00 − R40 000,00 − R120 000,00 = R400 000,00 net cash from operating activities.
| Cash flows from operating activities | R |
|---|---|
| Cash generated from operations | 560 000,00 |
| Interest paid | (40 000,00) |
| Income tax paid | (120 000,00) |
| Net cash from operating activities | 400 000,00 |
4. Worked example 2 — investing and financing activities
Still using Sizolwethu Ltd, the following cash movements took place during the year:
- Equipment was purchased for R300 000,00
- A vehicle was sold for R80 000,00
- Shares were issued for cash of R250 000,00
- A loan of R100 000,00 was repaid
- Dividends of R60 000,00 were paid
Investing: cash out is shown in brackets. R80 000,00 (in) − R300 000,00 (out) = R220 000,00 net cash used in investing activities.
Financing: shares issued and loans raised bring cash in; repayments and dividends take cash out. R250 000,00 − R100 000,00 − R60 000,00 = R90 000,00 net cash from financing activities.
| Investing activities | R |
|---|---|
| Purchase of equipment | (300 000,00) |
| Proceeds from sale of vehicle | 80 000,00 |
| Net cash used in investing activities | (220 000,00) |
| Financing activities | R |
|---|---|
| Proceeds from shares issued | 250 000,00 |
| Loan repaid | (100 000,00) |
| Dividends paid | (60 000,00) |
| Net cash from financing activities | 90 000,00 |
5. Worked example 3 — reconciling the cash balance
Now combine the three sections. Opening cash and cash equivalents were R130 000,00.
Step 1 — Net change in cash: R400 000,00 − R220 000,00 + R90 000,00 = R270 000,00.
Step 2 — Closing cash: R130 000,00 + R270 000,00 = R400 000,00.
| Reconciliation | R |
|---|---|
| Net change in cash and cash equivalents | 270 000,00 |
| Cash and cash equivalents at beginning of year | 130 000,00 |
| Cash and cash equivalents at end of year | 400 000,00 |
The closing figure of R400 000,00 must agree with the cash and cash equivalents line in the Balance Sheet. If it does not, an item has been missed or placed in the wrong section.
Common mistakes
- Forgetting to add back depreciation, which is a non-cash item.
- Treating an increase in debtors or inventories as cash inflow. Increases in current assets use up cash, so they are subtracted.
- Putting interest paid in the financing section. Under the usual Grade 12 layout it is shown under operating activities.
- Showing dividends paid under operating activities instead of financing.
- Mixing up loans raised (financing inflow) with the purchase of an asset (investing outflow).
- Not checking that the closing cash balance agrees with the Balance Sheet.
Quick summary / cheat sheet
| Item | Where it goes | Add or subtract |
|---|---|---|
| Depreciation | Operating (adjustment) | Add back |
| Interest expense | Operating (added back), interest paid | Add back then deduct |
| Increase in debtors | Operating | Subtract |
| Increase in creditors | Operating | Add |
| Buy a non-current asset | Investing | Subtract |
| Sell a non-current asset | Investing | Add |
| Issue shares | Financing | Add |
| Raise or repay a loan | Financing | Add / subtract |
| Pay dividends | Financing | Subtract |
The three-section rule: operating = running the business; investing = growing the business; financing = funding the business.
Practice questions
- Profit before tax is R300 000,00 and depreciation is R45 000,00. Calculate the starting point for cash generated from operations before working capital adjustments.
- Debtors decreased by R25 000,00 and creditors decreased by R15 000,00. What is the net working capital adjustment to cash generated from operations?
- A machine was bought for R180 000,00 and land was sold for R220 000,00. Calculate net cash from investing activities.
- Shares were issued for R400 000,00 and dividends of R90 000,00 were paid. Calculate net cash from financing activities.
- Net cash from operating activities is R250 000,00, net cash used in investing is R150 000,00 and net cash from financing is R80 000,00. Calculate the net change in cash.
- Using your answer to question 5, calculate the closing cash balance if opening cash was R60 000,00.
Answers
- R300 000,00 + R45 000,00 = R345 000,00.
- Debtors decreased, so cash is freed up: add R25 000,00. Creditors decreased, so cash was used: subtract R15 000,00. Net adjustment = +R25 000,00 − R15 000,00 = +R10 000,00.
- R220 000,00 − R180 000,00 = R40 000,00 net cash from investing activities.
- R400 000,00 − R90 000,00 = R310 000,00 net cash from financing activities.
- R250 000,00 − R150 000,00 + R80 000,00 = R180 000,00 net change in cash.
- R60 000,00 + R180 000,00 = R240 000,00 closing cash balance.
Official EduRank Team notes. Always cross-check with your textbook and teacher.