ACCT 1107 · Cash Flow: The Third Statement

Led by Fra Luca de Pacioli Simulacrum

1. Module 7 ○ Open

   Cash Flow: The Third Statement

   Led by Fra Luca de Pacioli Simulacrum

   The question

   Why the cash flow statement is indispensable — profit is not cash, and neither the income statement nor the balance sheet tells you how cash actually moved through the business over the period. The module covers the three sections (operating, investing, financing), the indirect method that dominates UK practice, how depreciation and impairments add back, how working-capital changes consume or release cash, and the diagnostic patterns of a healthy mature firm versus a growing, distressed, or financially-engineered one. The closing scenario reads a profitable business in trouble.

   Outcome

   The student can construct a cash flow statement using the indirect method, distinguish operating, investing, and financing cash flows, identify the working-capital changes that drive the divergence between profit and cash, and read the diagnostic pattern of a published cash flow statement. (Cash flow statement)

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   Practice scenarios

   The Profitable Business in Trouble

   You are advising a friend on a business they have been asked to invest in. The numbers look attractive: revenue £4.5m (up from £3.2m last year), profit before tax £680k (a healthy 15% margin). But the founder is asking for £400k of working-capital funding "to bridge a gap". Looking at the cash flow statement: operating cash flow is *negative* £150k. Investing activities show £200k of capex. Financing: £100k new bank facility drawn, £80k owner loan, no dividends. You're worried.

   Your goals

   • Diagnose the source of the negative operating cash flow despite the £680k profit. (Walk through: profit £680k, add back depreciation £180k → £860k. Then increase in receivables £620k, increase in inventory £290k, decrease in payables £100k. Working-capital absorption £1,010k. Net operating cash flow = −£150k.)
   • Identify what this means: every additional pound of profit is being absorbed (and more) by growing working capital. The "bridging gap" is structural, not temporary.
   • Explain to your friend in plain language why this is dangerous — the business is not failing, it is *growing too fast for its capital base*, which is a different but equally fatal problem.
   • Recommend what would change your view: tighter credit control on receivables, slower growth, or substantial new capital injection.

   Practise this scenario →