Cash Flow Statement
We finally made it to the cash flow statement — why it exists, why accrual alone isn't enough, and how CFO/CFI/CFF each tell a different part of the story.
Wow, we’re really at the tail end of FRA now!!!
To think we’ve actually made it to the Cash Flow Statement!!!!
Quick recap — back when we talked about financial statements, we said financial statements are basically pieces of paper with a bunch of tables on them showing stuff related to the company’s finances. And we said the “multiple/various” character is right there in the name — because it’s multiple statements stitched together.
We roughly walked through the B/S, roughly walked through the I/S, roughly walked through the statement of changes in equity, and the notes we just… couldn’t even touch.
Now it’s the last one — the Cash Flow Statement. That’s what we’re doing today.
Why even show this to us??
When you’re recording and presenting stuff about a company’s finances, the basic principle is Accrual Basis. Which means — you literally cannot show how actual cash came in and went out. That’s not what accrual is doing.
But honestly…… is there anyone out there willing to say “nah, the real cash movement doesn’t matter, accrual is what’s important”? Like, anyone? (T_T)
Obviously how the cash actually moved matters. And the financial statements themselves admit this — that’s why they tack on the cash flow statement. It’s their way of saying “yeah, okay, we see you, here’s the cash picture.”
Also — Cash flow is a huge deal in “Earnings Quality Assessment.” Like, extremely huge. They’ll tell you straight up: earnings with Sustainability = Cash Flow. The earnings that actually matter are the ones backed by cash that’s already walking in the door.
(cf. A common thread across the accounting-fraud blow-ups — Daewoo Shipbuilding, Korea Aerospace, all of them — was that operating income kept climbing while cash flow from operating activities was quietly shrinking. Same pattern every time, apparently.)
And it’s not just “here’s how cash moved, cool, done” either.
If all we did was eyeball how much Cash changed on the B/S — sure, we’d see the net change. But did that change happen because of the company’s main business (operating activities)? Or did the company go make investments — and the cash move is a byproduct of those?
(And when I say “company investing,” I don’t just mean buying stocks and bonds like you or me — I mean things like expanding a factory, pushing into a new line of business, funding a Project, all that kind of thing.)
Or maybe the company did a rights offering, issued bonds, raised funds somehow — and that’s what moved Cash around.
Being able to separate these out is what makes the info actually useful!
That’s why the cash flow statement splits into
— which is:
Cash Flow from Operating activities
Cash Flow from Investing activities
Cash Flow from Financing activities
That’s what those three are.
Rough feel first
Let’s get a rough vibe for CFO vs CFI and move on. Adding just a tiny bit of meat to the bones:
This isn’t the precise definition. And honestly — in reality these concepts do NOT snap into nice clean boxes. At all. Just take this as a gentle intro to the vocabulary.
So super roughly, on the B/S, let’s look at which regions each one tends to affect:
CFO is going to cluster up near the top. Running the business means: selling inventory on credit → A/R shows up; buying on credit → A/P shows up. That kind of stuff.
But it’s absolutely not 100% — Short-term Borrowing, for instance, is fund-raising, so that lands in Financing. And Long-term Receivable lands in Investing.
Over on the non-current liabilities and Equity side — that’s all fund-raising territory, so CFF is going to do most of the work.
And for non-current assets — those are the chunky things the company buys by investing in Projects. So those go under Investing.
Getting a rough feel like this is enough. BUT — at Level 1, there are a couple of things you just have to memorize cold:
Some stuff around taxes.
Some stuff around interest and dividends.
(It gets a little nasty. Brace yourself and burn it into your brain sharp before you walk into that exam room :-0)
Taxes first
Under US-GAAP — cash paid out in taxes gets swept, in its entirety, into CFO outflow. All of it. One bucket.
Under IFRS — the rule is: classify it separately if you can. If you can’t, dump it in CFO.
Because, for example, there are totally cases where taxes are paid not on operating activities but on investing or financing stuff.
Like when KEPCO sold that Samseong-dong land to Hyundai Motor — book value was 1.5 trillion won, sold for 10.5 trillion. So the disposal gain is 9 trillion won. And you owe taxes on 9 trillion × the tax rate. Shoving that into CFO feels kind of……… weird, right?
(Looking at this, you’d think “oh, easy, everything can be split up.” In practice, apparently, making this distinction is brutally hard. So a ton of listed companies just yeet Tax Payable straight into CFO and call it a day.)
Dividends and interest — slight pain incoming
This one’s a bit nasty and tangled. Hehh. But it’s not actually hard — let’s walk through it!
US-GAAP first.
Split things into stocks vs bonds, and for each there’s an Issuer side and an Investor side.
From the issuer’s side — whether you’re issuing bonds or issuing stocks, the Cash coming in is CFF.
From the investor’s side — whether you’re buying bonds or stocks, the Cash going out is CFI.
Makes total sense! Heh heh heh. Not confusing, right?
BUT — bonds or stocks you pick up for short-term investment purposes: those don’t go to CFI, they go to CFO.
(This is also totally commonsense. Heh heh heh. Not hard!!!)
Now — the coupon (interest) or dividends you receive as compensation for having invested, that’s slightly different.
For interest and dividends, everything except one thing is classified as CFO.
The one exception: when the issuer pays out dividends, that cash going out gets classified as CFF.
Memorize it like that and you won’t get tangled.
The minimum logic for making this stick:
- Interest: both the side paying it and the side receiving it run it through financial income / financial expense — so it shows up on the I/S.
- Dividends received: called dividend income, also flows through the I/S.
- But the side paying dividends? That does NOT flow through the I/S. It goes directly out of Retained Earnings, paired straight with Cash, and bounced out the door.
So that’s one of the reasons why that particular one is broken out separately as CFF. Remember it that way and you’re fine!!!!!!!
Same thing, IFRS flavor
The principle is identical to US-GAAP, but IFRS hands you a wider menu of choices. And notice — the choice lets you match the classification to whatever account title was used when you made the investment!!!!
(Here again, just zero in on the side paying out dividends and remember it as the exception — that unlocks the whole thing!)
See — I tried to hype this part up as nasty and complicated and confusing, but now that we’ve actually cracked it open, it’s really not that bad, right?!?!?! Haha heh heh.
One more detour — Non-Cash Transactions
Okay, so given a B/S and I/S, we need to see how to actually build the Cash Flow Statement. But… one more thing before that.
Non-Cash Transactions (비현금거래, if you’ve seen the Korean term floating around).
These are “transactions that have a huge effect on financial condition, but literally zero effect on cash.” And the note is: these have to go in the notes.
“Non-cash transactions aren’t reported in the C/F, but if they’re significant, they’re reported in a note or supplementary schedule.”
Example: Debt to Equity swap (basically the same effect as converting a CB). The debt and the equity get swapped — the creditor becomes a shareholder — and Cash moves zero. Absolutely zero.
(Normally, Liability↓ reads as “they paid off debt” and CFF↓, and Equity↑ reads as “they did a rights offering” and CFF↑. But in a D/E swap, none of that cash actually moves — it’s paper.)
Stuff like this — where it looks like Cash should have moved in a big way but it actually didn’t — gets written up in the notes.
Okay, building the thing
Now, for real — given B/S and I/S, how do we write the Cash Flow Statement?
We need to write each of CFO, CFI, and CFF.
About this:
“You can write it using the direct method or the indirect method.”
Direct Method: expose every single transaction, one by one — lay bare exactly how much money moved in which direction, from which transaction.
Indirect Method: compute and show the whole thing in one shot.
Yeah yeah — this direct vs indirect choice is only for CFO. And even if you do go with the direct method for CFO, you apparently still have to show the indirect-method version in the notes anyway. (So like… who’s actually using direct method…)
Wait, so accounting standards wrote this rule because indirect is more useful for information users, right?
But just from hearing the description — wouldn’t exposing every single transaction, hunting each one down and laying it all out, be clearer and therefore better info? That’s what my brain immediately jumps to. So how on earth is indirect more useful?!?!?!?!?!?!?
Can’t explain that right now. (T_T T_T T_T T_T) Because even if I tried to explain it right now, none of it would land. (T_T T_T)
Okay NOW — let’s actually write the Cash Flow Statement!!!!!!!
There’s an order:
From the given B/S and I/S, classify every single line item by which bucket it belongs to — CFO, CFI, or CFF.
Smash through CFI and CFF with the direct method.
Smash through CFO somehow — direct method, indirect method, whichever!
We’re going to build the cash flow statement following this order.
Let’s pause right here!!!!!!
Next post — we go smash through the whole thing!!!!!!!!
Originally written in Korean on my Naver blog (2021-10). Translated to English for gdpark.blog.