The cash flow statement and the three financial statements

A company publishes three financial statements, and each answers its own question. Reading only one shows a third of the company.

Two statements describe a period (September to May, a quarter, a year); the balance sheet is a snapshot on one date, such as 31 May.

The balance sheet links the other two:

• its cash changes by the period's net cash flow from the cash flow statement;
• its equity, what the company owes its owners, grows with the period's profit from the P&L;
• its liabilities include deferred revenue, the prepaid lessons Klasna still owes.

Leo used to read the P&L and skip the rest. The previous lesson showed why that surprises: a profitable May shrank the bank. The cash flow statement explains such months, and the balance sheet shows where they leave the company.

The cash flow statement sorts every payment in and out into three sections:

• Operating: running the business. Families' prepayments, tutor payouts, video, salaries, office, marketing.
• Investing: buying things that serve for years. This is capital expenditure (capex): Klasna's 432,000 UAH of laptops in August, or cameras and microphones for a recording studio.
• Financing: money from lenders and owners, and paying it back. A bank loan received, each repayment, money owners put in or take out.

The split matters because each section tells a different story. A company can burn cash in investing because it is building something, which is a choice; burning cash in operating means the business itself is not paying for itself, which is a warning. Financing shows how the gap was filled.

A useful test for any payment: is it part of delivering and selling this month (operating), something that will serve for years (investing), or money from or to those who fund the company (financing)?

Receivables (accounts receivable) are money customers owe for what has already been delivered. They appear when a company invoices and waits to be paid, as with Klasna for Teams: companies pay their invoices 30 to 60 days after the lessons.

At the end of November Klasna invoices a Teams client 640,000 UAH for November lessons; the client pays in January.

• P&L, November: revenue of 640,000 is in, because the lessons were delivered.
• Bank, November: nothing has arrived.
• Balance sheet, 30 November: receivables of 640,000.

So in the indirect method, November's operating cash flow subtracts the growth in receivables, −640,000, to remove revenue that is not cash yet. In January, when the client pays, receivables shrink by 640,000 and the operating section adds it.

The mirror image is deferred revenue: cash before revenue, so its growth is added. One way to remember: whenever a balance means "cash is still to come" and it grows, subtract; whenever it means "cash already came" and it grows, add.

Most companies build the operating section backwards from profit. That is the indirect method:

1. Start with operating profit.
2. Add back costs that moved no cash, such as depreciation.
3. Adjust for balances that grew or shrank:
   • deferred revenue (prepaid lessons) grew: cash came ahead of revenue, add;
   • receivables grew: revenue came ahead of cash, subtract;
   • payables grew: costs came ahead of payment, add.

The direct method would list cash received and paid instead; both reach the same total.

Klasna, September 2025 to May 2026: no laptops yet, no loans, no unpaid invoices.

That is almost twice the profit. With no investing or financing, cash on 31 May = 600,000 + 3,186,298 = 3,786,298 UAH.

One purchase shows how the three statements link. Klasna buys laptops for 432,000 UAH in August, to serve 24 months.

August:

• cash flow statement: −432,000 in investing;
• balance sheet: cash falls by 432,000 and an asset of 432,000 appears;
• P&L: nothing yet.

From September, every month:

• P&L: 18,000 of depreciation, which lowers operating profit;
• balance sheet: the laptops' value shrinks by 18,000;
• cash flow statement: the operating section adds the 18,000 back.

Why add it back? Not because depreciation brings cash; it brings none. It is added back because it lowered profit while no money left that month. The cash left once, in August, and was already shown in investing. Without the add-back the same 432,000 would be counted twice: once in investing and again, bit by bit, in operating.

So a company with large depreciation can show modest profit and healthy operating cash flow. Read both, and look at investing to see the purchases behind the depreciation.

Real quarters mix several adjustments at once. Take them one at a time, each with its own sign.

A quarter at Klasna, as an exercise:

The logic of each line:

• Depreciation lowered profit, but the laptops were paid for long ago: add it back.
• Receivables grew: 640,000 of revenue is in profit but not in the bank: subtract.

If deferred revenue had grown too (families prepaying winter lessons), that growth would be added; if payables had grown (tutors' November lessons paid on 5 December), that too would be added.

A quick sense check: operating cash flow should differ from profit by exactly the sum of the adjustments, here +54,000 − 640,000 = −586,000. If the gap does not match a list of named reasons, a line is missing.

The whole cash flow statement, built with the indirect method, follows one chain. Each step needs the one before.

1. Start from operating profit, from the P&L.
2. Add back non-cash costs, such as depreciation.
3. Adjust for balance changes: deferred revenue, receivables, payables. The result is operating cash flow.
4. Add investing and financing cash flows: equipment bought or sold, loans received or repaid, owners' money. The result is net cash flow for the period.
5. Add net cash flow to opening cash. The result is closing cash, the number on the balance sheet at the end of the period.

Klasna's school year as a check:

• operating profit 744,174.72;
• operating cash flow −315,319.75 after the prepayments reverse;
• net cash flow −747,319.75 after the 432,000 of laptops;
• closing cash 600,000 − 747,319.75 = −147,319.75 UAH.

The last step is what ties the statements together: closing cash must match the balance sheet, or something is wrong.

Hanna's forecast for the full school year, September 2025 to August 2026, shows how all three sections combine.

Operating:

• operating profit: 744,174.72 UAH;
• prepaid lessons fall by 1,086,661 over the year: families paid for fewer future lessons than they used, so cash goes the other way, −1,086,661;
• fees paid earlier on those prepayments come back: +27,166.53;
• operating cash flow: 744,174.72 − 1,086,661 + 27,166.53 = −315,319.75.

Investing: laptops, −432,000. Financing: 0.

Net cash flow: −315,319.75 − 432,000 = −747,319.75. Closing cash on 31 August: 600,000 − 747,319.75 = −147,319.75 UAH.

A year with a profit of 744,174.72 ends with less than nothing in the bank, if nothing changes. The P&L would never show it. The cash flow statement shows both why (summer uses spring's prepayments, and the laptops) and when the problem arrives, which is exactly what the next lesson measures.