Here we have two balance sheets; one at the end of year 0 and one at the end of year 1 What I would like to do is prove to you where that ending cash number of 20 has come from So we're going to reconcile these two balance sheets to net cash The first thing we need to do is categorized the balance sheet items into one of three catergories Operating, investing and financing Here we have the operating items in purple: accounts receivable, inventory and accounts payable Investing items in green: Financial Investments And financing items, lastly in red: Debt and Equity The next thing I want to do is try and work out what that cash flows have been regarding these balance sheets So let's look at the inventory line. Inventory was 80, it went up to 100 I've bought more inventory So I can assume that we've spent cash (cash has gone down) There's a very handy rule of thumb here If your assets have gone up (inventories an asset and it has gone up) your cash will have gone down Let's look at a liability, let's look at debt Debt was 40, it went up to 60 What's the cash flow there? Well an increase in debt must mean I must have got more cash from the bank Fantastic! That's good for my cash flow So the rule of thumb here is that if a liability or an equity have gone up, your cash has also gone up We need to do that for each of the items on the balance sheet apart from cash We end up with the following cash flows in the right most column We've already discussed inventory Inventory went up, it's an operating item, the cash flow was negative 20 And we discussed debt, debt went up. It's a financing item and it gave me a cash flow of positive 20 We now need to organize these items into the three sections of the cash flow statements And we start with the operating section Cash from operating activities or cash from operations My three purple items and have gone in, my three operating items have gone in And overall we've got cash from operations of negative 20, oh dear Next up we need the investing items, there was only one which was the financial investments Financial Investments went up from 20 to 30, that meant we had a negative cash flow of 10 Lastly the financing items Debt and equity both went up by 20, giving me cash from financing activities of positive 40 If I take the sub totals from each of those three sections Cash from operations negative 20 Cash from investing negative 10 Cash from financing positive 40. If I put them altogether we get to net cash flow of positive 10 And there's our positive 10 at the bottom. Net cash flow positive 10 for the year Fantastic news for the company We add that onto the company's beginning cash i.e. the 10 that the company had last year At the end of last year must be the beginning of of this year as well So I take cash at the end of last year; my beginning cash for this year is 10 Add on the net cash flow from the three sections above of 10 And I now get the year 1 ending cash of 20