Did the customers pay for every drink sold?
Start with a fictional café and one month. It has ₩5,000,000 in the bank at the beginning. It sells ₩10,000,000 of drinks during the month, but customers pay only ₩8,000,000. They still owe the other ₩2,000,000 at month-end.
That unpaid money has a name in the accounts: trade receivables. The café had no unpaid customer bills at the start, and it collects no money from earlier sales. Its closing receivables are therefore the ₩2,000,000 still owed on this month's drinks. Selling the drinks and receiving the money happen at different times.
For ingredients, the cash moves first. The café buys and pays for ₩5,000,000 of ingredients. It uses ₩4,000,000 in drinks sold this month and keeps ₩1,000,000 on the shelf. Those unused ingredients are its closing inventory. It began with no inventory, and there are no unpaid supplier bills. The ingredients on the shelf have already used cash, even though they have not yet gone into drinks sold.
The café also pays ₩4,200,000 for the other costs of running the business, ₩500,000 of interest and ₩200,000 of assumed income tax. These expenses are all paid in full this month. We can now list what actually entered and left the bank through running the café.
This part of the money movement is called operating cash flow. Listing the receipts and payments, as below, is the direct method. A positive amount is money received; a negative amount is money paid.
This example places paid interest and income tax in operating activities. That classification is not universal: an actual company's statement and notes explain its accounting framework, policies and transaction details. These tables are a teaching model, not a complete Korean IFRS statement. On a narrow screen, scroll sideways within a table to see every column.
| Operating cash movement | Amount |
|---|---|
| Customer receipts | ₩8,000,000 |
| Inventory purchases paid to suppliers | −₩5,000,000 |
| Other operating payments | −₩4,200,000 |
| Interest paid | −₩500,000 |
| Income tax paid | −₩200,000 |
| Net operating cash flow | −₩1,900,000 |
The calculation is ₩8,000,000 − ₩5,000,000 − ₩4,200,000 − ₩500,000 − ₩200,000 = −₩1,900,000. Running the café used ₩1,900,000 more cash than it brought in. The unpaid customer bills supplied no cash, while the unused ingredients had already been paid for.
Why do the accounts still show a ₩800,000 profit?
This is the fictional company-operated café from our revenue and profit guide, given a new, independent month. Its starting balances are not a continuation of that article's closing balance.
For profit, the café counts the ₩10,000,000 of sales completed this month as revenue. That includes the ₩2,000,000 customers have yet to pay. Receiving that money later will not create the same sale a second time.
It then subtracts the ₩4,000,000 cost of ingredients used in the drinks sold. The whole ₩5,000,000 ingredient purchase does not enter this month's cost of sales, because some ingredients are still on the shelf. This calculation matches sales with the costs assigned to the period. The bank account follows the collections and payments instead.
There is also a ₩300,000 cost for older equipment: depreciation. The accounts spread the equipment's cost across the periods when it is used. This month's share reduces profit, even though it requires no new payment for that equipment. Operating expenses therefore include the ₩4,200,000 cash expenses and ₩300,000 depreciation.
The table collecting the month's revenue and expenses is the income statement. After subtracting ₩500,000 of interest expense and ₩200,000 of assumed income tax expense, it leaves ₩800,000 of net income: the profit after those costs.
| Income-statement line | Amount |
|---|---|
| Revenue | ₩10,000,000 |
| Cost of sales | ₩4,000,000 |
| Cash operating expenses | ₩4,200,000 |
| Depreciation within operating expenses | ₩300,000 |
| Operating profit | ₩1,500,000 |
| Interest expense | ₩500,000 |
| Assumed income tax expense | ₩200,000 |
| Net income | ₩800,000 |
The café can report that profit while operating cash falls ₩1,900,000. Some sales remain unpaid, some purchases remain unused, and depreciation reduces profit without a payment this month. The two calculations follow different parts of the same story.
What happens after buying a machine and taking a loan?
There are more movements in the café's bank account. At month-end it pays ₩1,200,000 for new equipment awaiting installation. The equipment is not ready for use, so there is no depreciation on this purchase this month. The ₩300,000 depreciation above belongs to older equipment.
Buying equipment is an investing cash outflow in this example. Investing here includes equipment for the business. The full purchase price leaves the bank, but it is not an immediate expense in this month's profit calculation.
The café also receives a new ₩2,000,000 loan and repays ₩600,000 of existing loan principal. Principal is the money borrowed; interest is the separate charge for borrowing it. Taking a loan creates a liability, meaning money the company owes. Repaying principal reduces that liability. Neither the loan received nor the principal repaid enters revenue or expenses here.
These movements belong to financing cash flow: money raised and returned. The net amount is ₩2,000,000 − ₩600,000 = ₩1,400,000. Interest is accounted for separately above.
We can now put the three parts together. Begin with the ₩5,000,000 opening bank balance, subtract the cash used in operations and equipment purchases, then add the net cash from borrowing and repayment.
| Balance or activity | Amount |
|---|---|
| Opening cash | ₩5,000,000 |
| Net operating cash flow | −₩1,900,000 |
| Net investing cash flow | −₩1,200,000 |
| Net financing cash flow | ₩1,400,000 |
| Net change in cash | −₩1,700,000 |
| Closing cash | ₩3,300,000 |
The net movement is −₩1,900,000 − ₩1,200,000 + ₩1,400,000 = −₩1,700,000. Adding it to opening cash gives the ₩3,300,000 closing balance. The net cash change already totals the three activities; it is not another movement to add to them. Nor is the ₩800,000 profit an extra deposit. It is already reflected when operating cash flow is reconciled with profit.
The café made a profit, but customer money was still outstanding and cash went into unused ingredients and new equipment. Even with a new loan, its bank balance fell ₩1,700,000.
What changes if the café collects or borrows another ₩1,000,000?
First suppose customers pay an extra ₩1,000,000 of the money they already owe. Those sales are already in revenue, so revenue and net income stay unchanged. Receivables end at ₩1,000,000 instead of ₩2,000,000, and operating cash flow improves to −₩900,000.
Alternatively, suppose customer payments stay the same and a lender advances another ₩1,000,000. It arrives at month-end with no additional interest or fees this month. Operating cash flow stays at −₩1,900,000; financing cash flow rises to ₩2,400,000.
The table treats these as two separate changes to the baseline month. It does not combine the extra collection with the extra borrowing.
| Case | Net income | Customer receipts | New borrowing | Operating cash flow | Investing cash flow | Financing cash flow | Net cash change | Closing cash |
|---|---|---|---|---|---|---|---|---|
| Baseline month | ₩800,000 | ₩8,000,000 | ₩2,000,000 | −₩1,900,000 | −₩1,200,000 | ₩1,400,000 | −₩1,700,000 | ₩3,300,000 |
| Collect an extra ₩1,000,000 | ₩800,000 | ₩9,000,000 | ₩2,000,000 | −₩900,000 | −₩1,200,000 | ₩1,400,000 | −₩700,000 | ₩4,300,000 |
| Borrow an extra ₩1,000,000 | ₩800,000 | ₩8,000,000 | ₩3,000,000 | −₩1,900,000 | −₩1,200,000 | ₩2,400,000 | −₩700,000 | ₩4,300,000 |
Both alternatives leave ₩4,300,000 in the bank, and both still show ₩800,000 of profit. In the first, customers have paid more of what they owe. In the second, the café owes more money to a lender. The balance alone cannot tell you which happened. Neither receipt is another ₩1,000,000 of profit.
Further reading: work back from profit to cash
Following the receipts and payments already explains the closing bank balance. This section is an optional closer look at another way to reach the same operating cash figure. It starts with net income and adjusts the differences. That is called the indirect method.
Start with the ₩800,000 profit. Add back the ₩300,000 depreciation that reduced profit without a payment this month. Subtract the ₩2,000,000 of sales still owed by customers. Then subtract the ₩1,000,000 spent on ingredients still in inventory, whose cost has not yet reduced profit.
| Starting figure or adjustment | Amount |
|---|---|
| Net income | ₩800,000 |
| Add back non-cash depreciation | ₩300,000 |
| Increase in trade receivables | −₩2,000,000 |
| Increase in inventory | −₩1,000,000 |
| Net operating cash flow | −₩1,900,000 |
Adding back depreciation creates no cash receipt. It reverses a cost included in profit so that the calculation can reach a cash figure. The older equipment cost cash at an earlier point; this month's depreciation allocates part of that cost to this period.
The other adjustments reflect sales ahead of collections and purchases ahead of consumption. The direct method lists receipts and payments; the indirect method adjusts net income. Both arrive at the same ₩1,900,000 operating outflow. Net income is the starting figure here, not another amount to add to operating cash flow.
Look for the reason cash moved
The baseline café still has ₩3,300,000 in the bank. Its cash declined despite new borrowing, but that alone does not show whether it can pay the bills ahead. This month does not tell us when customers will pay, when loans must be repaid, whether more borrowing is available or which bills come next.
The signs of the three activity totals also need context. Negative investing cash flow may reflect equipment purchases. Positive investing cash flow may come from selling assets. Positive financing cash flow can reflect new funding; negative financing cash flow can reflect repayment.
Operating outflows deserve investigation, but one build-up of inventory cannot establish a lasting trend. Compare several periods in the same currency and covering the same company or group of companies. Receivables, inventory and borrowing notes help explain the movements.
The rights issue guide follows another source of financing: new money from shareholders. If you then use profit to value shares, our P/E, P/B and ROE guide explains what those ratios measure.
A cash flow statement follows money over a period. A balance sheet shows balances on one date. Our debt-to-equity and current ratio guide uses a separate company to show why current assets can exceed current liabilities while tomorrow's payment still exceeds available cash.
About the examples
The fictional month and five tables were created for this guide. Both languages use identical Korean-won amounts. Cash means this bank account, with no cash equivalents. Opening receivables and inventory are zero; payables, accruals and tax balances have no other changes, and depreciation is the only non-cash expense.
Interest and the assumed income tax are paid in full and classified as operating here. Expense amounts, payment timings, equipment availability and borrowing terms are illustrative. There are no VAT cash flows, foreign-exchange effects, revaluations, leases or non-cash borrowing. This is not a complete financial statement or a universal accounting classification. See our editorial policy.