Harbor Coffee, our fictional coffee business, reports $150 million of profit in FY3. That profit already includes a $40 million depreciation expense, with no matching cash payment. Its operations generated $180 million of cash.
Add $150 million and $40 million: $190 million. What explains the missing $10 million?
The three-statement overview explained where Harbor's cash went. Here, start one step earlier and trace accounting profit into operating cash.
Start with the period and cash
Harbor opens FY3 with $105.4 million, its FY2 closing balance, and ends with the same amount. Cash flow explains what happened between those snapshots during the year.
Harbor's fictional accounts report the inputs in USD millions; the bridges are our calculations. Its cash is unrestricted, with no exchange-rate effect.
The statement has three sections:
- Operating cash flow (OCF, also CFO) is cash generated or used by running the business.
- Investing cash flow (CFI) covers purchases and sales of long-lived assets and investments.
- Financing cash flow (CFF) covers borrowing, principal repayments and cash raised from or paid to owners.
Harbor uses the indirect method: start with net income and adjust it to reach operating cash. The direct method lists operating receipts and payments instead. Both reach the same total.
Turn profit into operating cash
Accrual accounting records revenue when earned and expenses when incurred. The payment can happen earlier or later.
Harbor's $40 million of D&A is all depreciation, the equipment cost allocation already deducted from profit. Amortization applies that idea to intangible assets with a finite useful life, such as a purchased patent.
Adding back the $40 million is a noncash adjustment: it removes that expense from the cash calculation. Nobody sends Harbor a depreciation check.
You have reached $190 million. There is still $10 million to explain before you get to operating cash.
Harbor's statement supplies the missing step: a −$10 million working-capital adjustment. Changes in operating assets and liabilities absorbed cash. The bridge is $150 million + $40 million − $10 million = $180 million.
Suppose a business makes a $100 sale on credit this year and the customer has not paid by year-end. Profit includes the sale; cash does not. The new $100 receivable is subtracted in the operating reconciliation.
A $100 service bill incurred this year but still unpaid works the other way. The expense reduces profit, yet the money has not left. The rise in payables adds $100 back. When the bill is paid next year, the falling payable reduces operating cash without a second expense.
The liquidity lesson found $5 million more receivables, $5 million more inventory and $2 million more prepayments, offset by $2 million more supplier bills. That leaves $10 million tied up; here it enters as −$10 million. These operating balances exclude cash and borrowings, so their change need not equal the change in total working capital.
Read investment cash next
Harbor spends $60 million on equipment in FY3. This is capital expenditure, or capex: cash spent on assets that benefit future periods. Its investing cash flow is −$60 million.
The $60 million payment belongs here, in investing. Depreciation spreads equipment costs through profit over time. One clock follows the payment; the other follows the asset's use.
A negative investing total can reflect replacement or expansion. A positive one can reflect asset sales. Selling a machine brings in money once; it does not mean more customers bought coffee. Read the source of the cash before judging the sign.
Read borrowing and owner cash
Harbor pays $60 million in dividends and spends $60 million on share repurchases, with zero net borrowing in FY3. Its financing cash flow is −$120 million.
Paying owners uses cash; it does not create another expense in the profit calculation.
Borrowing supplies cash without earning revenue. Repaying principal, the amount borrowed, uses cash without reducing profit. Interest is a separate cost of borrowing. The later debt and leverage lesson builds on that distinction.
Harbor follows US accounting rules, or US GAAP: its interest payments go in operating cash, its dividends in financing. Other accounting frameworks can classify interest and dividends differently.
Reconcile the total
Harbor's FY3 section totals, in USD millions:
| Cash-flow section | Net cash | Main source/use |
|---|---|---|
| Operating | +180 | Business operations |
| Investing | −60 | Equipment |
| Financing | −120 | Dividends and buybacks |
FX is the separately stated effect of exchange-rate changes on cash. Use the statement's cash definition at both ends. For Harbor: $105.4 million + $180 million − $60 million − $120 million + $0 = $105.4 million.
Which is the biggest profit-to-cash adjustment, and which section used the most cash?
The biggest profit adjustment is $40 million of depreciation. The biggest cash-use section is $120 million paid to owners. An addback explains the gap; a payment moves money.
Harbor's operations covered its equipment spending and owner payments for the year, with no net new borrowing or fall in cash. Whether the pattern can continue depends on future operations and spending; the three signs alone cannot tell you.
Try the same bridge with Apple
Apple reports these figures on page 33 of its FY2024 annual filing, in Item 8. Filed November 1, 2024, it covers the year ended September 28, 2024. Amounts are USD millions:
| Operating excerpt | FY2024 |
|---|---|
| Net income | 93,736 |
| D&A | 11,445 |
| Share-based compensation | 11,688 |
| Operating cash flow | 118,254 |
Apple's share-based compensation (SBC) is a noncash employee expense. The stock-based compensation lesson explains what paying staff with equity awards costs owners.
What net adjustment is missing between the first three rows and OCF?
The first three sum to $116,869 million. Subtract that from OCF: $118,254 million − $116,869 million = +$1,385 million. This calculated remainder combines the other adjustment lines on page 33; it is not an Apple-reported subtotal.
For another company, start with the period and cash label, then follow both bridges. The filings lesson helps you find them.
Apple also reports $9,447 million paid for property, plant and equipment (PP&E). Next, free cash flow uses both companies' operating cash and capex to find what remains after capital spending.
In short
- Accrual profit and cash follow different clocks.
- Adding back depreciation changes the calculation, not the bank balance.
- An unpaid bill is a balance; the cash reconciliation needs the change.
- Equipment spending and payments to owners can use all the cash operations generate.
- Reconcile all three sections to closing cash, using the statement's own cash definition.