STEP 1Why do profit and cash differ?
The amount on a pay slip and your bank balance are not always the same. Companies are no different. Start by separating what 'profit' and 'cash' each count.
Profit is 'money recognized', cash is 'money received'
The income statement is written on an . Regardless of whether money actually changes hands, revenue is recognized at the moment the goods are delivered and the work is done, and the costs incurred for that revenue are recorded in the same period. This approach is right for fairly measuring how well a company did business over a year, because comparison would be hard if results swung with the date cash came in.
The problem is that profit recognized this way is not immediately money in the bank. Say that at the end of December the fictional Robin Bakery sold 100 cakes on credit to a regular café at KRW 50,000 each. The income statement books KRW 5 million of sales right away and profit rises, but not a single won has reached the bank account. Instead, the balance sheet gets KRW 5 million of , money owed to you. It only becomes cash when the café pays in January.
So the financial statements have one more table that records only the money that actually came in and went out. That is the . If the income statement is the 'business report card', the cash flow statement is the year's 'bank account record'. Like the income statement, it records a period of one year rather than a single day, while the cash on the balance sheet is the balance on the day that record ends.
The bank record is divided into three sections
The cash flow statement splits money movements into three groups by reason. Money from the core business of selling bread, buying ingredients, and paying wages is ; money from buying and selling long-lived assets such as ovens and stores is ; and money from borrowing and repaying, paying dividends to shareholders, and issuing new shares is . The sum of the three is the cash that rose or fell during the year, and adding it to the opening balance gives the year-end balance.
Opening cash + operating activities + investing activities + financing activities = closing cashRobin Bakery (fictional): KRW 400 million + KRW 1.8 billion − KRW 1 billion − KRW 400 million = KRW 800 million → equal to the KRW 800 million of cash and cash equivalents on the balance sheet
The answer to today's question is here too. Robin Bakery's net income is KRW 1.2 billion, but the cash that came in from the core business was KRW 1.8 billion, of which KRW 1 billion was spent on investments such as ovens and equipment and KRW 400 million on dividends and debt repayment. So only KRW 400 million was left in the account. The money did not disappear; it moved elsewhere.
Quick checkIn December, Robin Bakery sold cakes on credit for KRW 5 million of revenue and collected the money the following January. How does this appear on this year's income statement and this year's cash flow statement?
This year's income statement books KRW 5 million of revenue, while this year's cash flow statement still shows KRW 0. Instead, KRW 5 million of trade receivables remains on this year-end balance sheet. The money arrives next January, so KRW 5 million shows up in operating activities on next year's cash flow statement.
STEP 2The profit account and the cash account
The same transaction can move profit and cash differently. If you set up two accounts and put in the transactions one by one, you can see right away where the difference comes from.
See it in a picture: one transaction, two accounts
Press the buttons below to trigger transactions at Robin Bakery (fictional) one at a time. The top bar is the 'profit account' that builds up on the income statement, and the bottom bar is the 'cash account' that builds up on the cash flow statement. Look for cases where, for the same transaction, only one moves or they move in opposite directions.
Press a button to add a transaction. Amounts are in units of KRW 10,000.
These are simplified transactions of a fictional company (in units of KRW 10,000). Only revenue is reflected for the credit sale, excluding its cost of sales and taxes, and the oven is assumed to cost KRW 10 million and be used for 10 years.
Five things that pull profit and cash apart
The figure shows five main differences. First, a credit sale books profit first and brings in cash later. The more receivables grow, the less cash there is relative to profit. Second, an inventory purchase sends cash out first, but ingredients not yet sold stay as rather than an expense, so profit is unchanged. Third, an equipment purchase also sends out cash all at once, but it is booked as an asset, not an expense.
Fourth, the cost of that equipment is converted into expense over the years you use it, and this is the you saw in Lesson 7. Depreciation reduces profit but no cash leaves that year, because the money already went out when the equipment was bought. Such expenses are called . Robin Bakery has KRW 1 billion of depreciation inside cost of sales and SG&A, so that much more cash came in than profit. Fifth, borrowing, repaying, and dividends are not business performance, so they do not affect profit, but they move cash significantly.
Profit > cash is likely when receivables and inventory grow · profit < cash is likely when depreciation is largeThat is why net income alone cannot tell you the state of a company's bank account
Direct method and indirect method
There are two ways to present cash flow from operating activities. The direct method lists actual cash inflows and outflows by item, such as cash received from customers and cash paid to suppliers. The starts from net income, adds back expenses that did not use cash such as depreciation, and subtracts amounts where cash is tied up such as growth in credit sales and inventory. Accounting standards (K-IFRS 1007) allow either and encourage the direct method, but in listed companies' reports the indirect method is far more common. The indirect method shows line by line 'why net income differs from cash', so it actually gives investors more to read. In the next lesson we will cross this bridge one step at a time.
Common misconceptions
- "A big net income means the company has lots of cash?"
- No. When receivables and inventory pile up, the bank account can run dry even with large profits. Conversely, even in a loss-making year, cash can come in if depreciation is large.
- "Cash fell, so the business must be doing badly?"
- Not necessarily. If, like Robin Bakery, a company spends the money earned from its core business on equipment investment and dividends, year-end cash does not grow much even though business went well. You need to look at which section it fell in.
- "Depreciation doesn't use cash, so I can ignore it?"
- No. Depreciation spreads out money already spent in the past to buy equipment. Equipment will need to be bought again someday, so on the cash flow statement it should be viewed together with equipment purchases under investing activities (free cash flow in Lesson 20).
Quick checkRobin Bakery bought a new KRW 20 million oven with cash. What happens to this year's profit on the income statement and to cash on the cash flow statement? (Assume the oven is used for 10 years.)
Profit falls only by the KRW 2 million of depreciation, while cash falls by the full KRW 20 million at once. The oven's price is booked as an asset and becomes an expense over 10 years, but the cash goes out on the day of purchase. This KRW 20 million is recorded in investing activities on the cash flow statement as 'acquisition of property, plant and equipment'.
STEP 3Robin Bakery's cash flow statement and DART
Now let's lay out Robin Bakery's year of bank records on one page. Follow the path from KRW 400 million at the start of the year through three sections to KRW 800 million at year-end.
See it in a picture: from KRW 400 million opening to KRW 800 million closing
Press a bar or a button below. It shows what money is in each section.
There was KRW 400 million in the account at the start of the year. Press a bar to see what money moved during the year.
This is the cash flow of the fictional company Robin Bakery for one year (Year 3). Operating activities are reconciled using the indirect method, starting from net income.
The order for reading the numbers is simple. First, check whether operating activities are positive, because that means the company is earning cash from its core business. Robin Bakery took in KRW 1.8 billion, more than its KRW 1.2 billion of net income. Next, see where that money was spent. KRW 1 billion went to equipment such as ovens and stores and to intangible assets, KRW 300 million to dividends, and KRW 100 million to repaying debt. The remaining KRW 400 million built up in the account to make year-end cash of KRW 800 million, which matches exactly the 'cash and cash equivalents of KRW 800 million' on the balance sheet from Lesson 6.
Finding it yourself on DART: the consolidated cash flow statement
Open the annual report you looked at in Lesson 3 again. The screen below is the consolidated cash flow statement from the annual report of a large listed company (filed 2025.03.11, 2024 results). It is only an example of how to find your way around, not an investment recommendation.
![DART annual report screen: 2-5. Consolidated cash flow statement in the table of contents, with the operating and investing cash flow lines]()
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- 1In the table of contents, open III. Financial Matters → 2. Consolidated Financial Statements → 2-5. Consolidated Cash Flow Statement.
- 2Check the unit. This table is in millions of won, so 72,982,621 is about KRW 73 trillion.
- 3Look at the total cash flow from operating activities. In 2024 it was about KRW 73.0 trillion, more than twice the same year's net income (about KRW 34.5 trillion). That is because it is a company with large non-cash expenses such as depreciation.
- 4Scroll down to check cash flow from investing activities (about −KRW 85.4 trillion) and cash flow from financing activities (about −KRW 7.8 trillion), and verify that closing cash and cash equivalents at the bottom (about KRW 53.7 trillion) match the cash on the balance sheet.
Source: FSS DART, Samsung Electronics annual report (filed 2025.03.11, rcpNo 20250311001085), screen of III-2-5 Consolidated Cash Flow Statement, captured 2026-10-08. This is a navigation example and not a stock recommendation.
The actual table has one more line besides the three sections. It is 'effect of foreign currency translation on cash', which arises when foreign-currency cash held overseas, such as dollars, is converted into won. For this company in 2024, that line was about KRW 4.8 trillion, and the cash decrease of about KRW 15.4 trillion including the three sections and this line turned opening cash of about KRW 69.1 trillion into closing cash of about KRW 53.7 trillion. The closing figure of KRW 53,705,579 million is the same number as the cash and cash equivalents on the consolidated balance sheet of the same report.
How to use it in investing
| When you see numbers like this | Try reading them like this |
|---|
| Net income is positive but operating cash flow is negative | Check the balance sheet for built-up receivables (unpaid sales) and inventory. If it lasts several years rather than one, it is a warning sign (Lesson 21) |
| Operating cash flow is consistently larger than net income | Common in equipment-heavy industries with large depreciation. Equipment purchases under investing activities are large too, so look at them together (Lesson 20) |
| Year-end cash dropped sharply | Check which section it dropped in. The meaning is the opposite depending on whether it was equipment investment or dividends, or the core business being negative |
| Year-end cash rose sharply | Check whether it was earned from the core business or came in from borrowing or issuing new shares (financing activities) |
That is not always the case. The cash flow statement is based on the balance on the last day of the year, so collecting receivables in a rush or delaying payments at year-end can make a year's numbers look good. Look at several years together and read them alongside the income statement and balance sheet. This lesson does not recommend buying or selling any particular stock.
Quick checkIn one year Robin Bakery had operating activities of +KRW 1.8 billion, investing activities of −KRW 1 billion and financing activities of +KRW 600 million (newly borrowed money). Starting from opening cash of KRW 400 million, what is closing cash?
KRW 1.8 billion. KRW 400 million + KRW 1.8 billion − KRW 1 billion + KRW 600 million = KRW 1.8 billion. However, KRW 600 million of the increase was borrowed rather than earned. Which section the increase came from matters more than the fact that closing cash rose.