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Answer – Cash Flow Statement

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This is the suggested answer to the Cash Flow Statement exercise on Colorado Ricardo Mountain Bikes.

Cash flow statement: operating, investing and financing activities

Operating Activities

Cash generated from normal trading: +$350,000.

Investing Activities

Cash spent on new factory equipment: -$150,000.

Financing Activities

Cash used to repay loan principal: -$100,000.

Reconciliation

Net change in cash: $350,000 – $150,000 – $100,000 = +$100,000. Opening cash of $400,000 plus the $100,000 net increase gives a closing cash balance of $500,000, matching the balance sheet.

Why Cash Rose by Less Than Profit

Operating profit was $200,000, but cash only rose by $100,000, because profit is not the same as cash: equipment purchases and loan repayments are real cash outflows that never appear on the Profit and Loss Statement.

Key point: a profitable business can still run short of cash if it is investing heavily or repaying debt – which is exactly why a marketer proposing a new e-mountain-bike launch needs to check the cash flow statement, not just the profit figure, before assuming the business can afford it.

These figures are consistent with the Balance Sheet exercise, where the same $500,000 closing cash balance appears as a current asset.