Statement of cash flows · Trial Balance

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A statement that shows where cash came from and where it went during the year. It has three parts: operating activities (day-to-day trading), investing activities (buying and selling long-term assets) and financing activities (loans, shares and dividends). The total change in cash links the opening and closing cash on the balance sheet.

Example. A company makes £660,000 cash from trading, spends £300,000 on new equipment and pays out £250,000 on loans and dividends. Cash goes up by £110,000, from £180,000 to £290,000.

Key words

Operating activities: In the statement of cash flows: cash from the business’s normal day-to-day trading, such as cash from customers and payments to staff and suppliers.Example: Cash received from customers of £400,000 is an operating cash flow.
Investing activities: In the statement of cash flows: cash paid for, or received from selling, long-term assets and investments.Example: Buying equipment for £30,000 and selling an old van for £5,000 are investing activities.
Financing activities: In the statement of cash flows: cash received from or paid to the business’s owners and lenders.Example: Issuing new shares for £10,000 and repaying £8,000 of a loan are financing activities.
Indirect method: A way to work out operating cash flow. Start with profit, then add back items that did not use cash (such as depreciation) and adjust for changes in stock, receivables and payables.Example: Profit £50,000 + depreciation £12,000 − increase in stock £4,000 = £58,000 so far.
Cash equivalents: Investments that can be turned into a known amount of cash very quickly (usually within 3 months) with very little risk. They are counted together with cash.Example: Money in a 3-month bank deposit is a cash equivalent.

The statement, explained

Marsh Lane Cycles Ltd 1

Statement of Cash Flows

for the year ended 31 December 2025

	2025 £000	2024 £000
Cash flows from operating activities 2
Profit before tax 3	640	560
Adjustments for:
Depreciation 4	200	190
Amortisation 4	20	20
Finance costs 5	60	70
	920	840
Increase in inventories 6	(70)	(40)
Increase in trade receivables 6	(70)	(50)
Increase in trade and other payables 6	50	30
Cash generated from operations 7	830	780
Interest paid 8	(30)	(70)
Income tax paid 9	(140)	(120)
Net cash from operating activities	660	590
Cash flows from investing activities 10
Purchase of property, plant and equipment	(300)	(250)
Net cash used in investing activities	(300)	(250)
Cash flows from financing activities 11
Repayment of bank loan	(100)	(100)
Dividends paid	(150)	(120)
Net cash used in financing activities	(250)	(220)
Net increase in cash and cash equivalents 12	110	120
Cash and cash equivalents at 1 January	180	60
Cash and cash equivalents at 31 December 13	290	180

What each numbered line means

Heading. The fourth main statement. It covers a period (“for the year ended”) and shows only real cash movements. Figures are in £000.
Operating activities. Cash from the company’s normal trading. This statement uses the indirect method: start with profit and adjust it to cash.
Profit before tax. Taken from the statement of profit or loss (640).
Depreciation and amortisation. Expenses that did not use any cash this year, so they are added back.
Finance costs. Added back here because the interest actually paid is shown further down as a separate line.
Working capital changes. Found by comparing this year’s and last year’s statement of financial position. Inventory rose from 540 to 610, which used 70 of cash. Receivables rose from 650 to 720, which used 70. Payables (not counting the interest accrual) rose from 520 to 570, which kept 50 of cash in the business.
Cash generated from operations. The cash the trading made before interest and tax: 830. Compare it with operating profit of 700.
Interest paid. The interest expense (60) minus the amount still owed at the year end (30) = 30 actually paid.
Income tax paid. Tax owed at the start (140) + this year’s current tax charge (140) − tax owed at the end (140) = 140 paid. The deferred tax part of the expense is not cash.
Investing activities. Cash spent on long-term assets: PPE additions of 300. The 150 revaluation is not here because no cash moved.
Financing activities. Cash to and from lenders and shareholders: the loan fell from 1,100 to 1,000 (100 repaid), and dividends of 150 were paid.
Net increase in cash. 660 − 300 − 250 = 110.
Closing cash. 180 + 110 = 290. This must match cash in the statement of financial position.

How to read it

Is profit turning into cash? Cash generated from operations (830) is more than operating profit (700): 119%. That is a healthy sign.
Free cash flow: net cash from operating activities 660 − spending on assets 300 = 360.
What was the free cash used for? Repaying 100 of the loan and paying 150 of dividends, with 110 left over, which increased the cash balance.
Is the company investing? It spent 300 on assets, more than the 200 depreciation, so it is growing its asset base, not just replacing it.
Warning signs to look for in any company: operating cash well below profit, working capital using more and more cash, or dividends paid from borrowing.

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How to make it yourself

You need the statement of profit or loss, both years of the statement of financial position, and some extra information. All figures are in £000.

From the statements of financial position	2025	2024	Change
Inventories	610	540	+70 (uses cash)
Trade receivables	720	650	+70 (uses cash)
Trade and other payables (excluding interest accrual)	570	520	+50 (keeps cash)
Interest accrual (inside payables)	30	0
Current tax payable	140	140
Bank loan (total)	1,000	1,100	−100 (repaid)
Cash and cash equivalents	290	180	+110

Other information: depreciation 200, amortisation 20, PPE additions 300 (all paid in cash), dividends paid 150.

Start with profit before tax: 640.
Add back non-cash items: depreciation 200, amortisation 20, and finance costs 60. Subtotal 920.
Working capital: an increase in an asset uses cash, so subtract (inventories 70, receivables 70). An increase in a liability keeps cash, so add (payables 50). Cash generated from operations: 830.
Interest paid: 60 − 30 still owed = 30.
Tax paid: 140 owed at the start + 140 charge − 140 owed at the end = 140.
Net cash from operating activities: 830 − 30 − 140 = 660.
Investing: PPE bought (300). Ignore the revaluation, as it is not cash.
Financing: loan repaid (100), dividends paid (150).
Net change: 660 − 300 − 250 = 110.
Check: opening cash 180 + 110 = 290, which matches the statement of financial position.

Fill it in yourself

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