Real-world examples of common mistakes in cash flow statements

Real examples of common mistakes in cash flow statements you see all the time

Let’s start with the kinds of errors that actually show up in real filings and internal reports. The best examples of common mistakes in cash flow statements usually fall into a few predictable buckets: misclassification, missing adjustments, and inconsistent logic between periods.

When you look at real examples, the pattern is obvious: the income statement and balance sheet may be technically correct, but the cash flow statement quietly tells a different story because someone treated a financing outflow as an operating expense or forgot to reverse a non-cash gain. These examples of misstatements don’t always rise to the level of fraud, but they can seriously mislead lenders, investors, and even management.

Misclassifying interest and dividends: classic example of distorted operating cash flow

One of the most common examples of common mistakes in cash flow statements is the treatment of interest and dividends.

Under U.S. GAAP, companies typically present:

• Interest paid: Operating activity
• Interest received: Operating activity
• Dividends received: Operating activity
• Dividends paid: Financing activity

Under IFRS, there is more flexibility, but the choice must be consistent over time. The problem appears when companies mix and match.

Imagine a mid-sized manufacturing firm that, in 2023, reported:

• Interest paid as an operating outflow
• Dividends paid as a financing outflow

Then in 2024, a new controller decides to treat interest paid as a financing outflow to “align with IFRS practice,” but leaves prior-year comparatives unchanged and doesn’t disclose the change clearly.

On paper, operating cash flow suddenly jumps by several million dollars. Nothing about the underlying business improved; the company just moved interest out of operating activities. This is a textbook example of how a classification decision can inflate operating cash flow and mislead anyone screening for “strong cash generation.”

Regulators like the SEC have repeatedly reminded companies about consistency in presentation of cash flows and clear disclosure of classification choices (see SEC guidance on non-GAAP measures and cash flow presentation at sec.gov). When you see operating cash flow swing sharply with no matching business explanation, this is one of the first examples of errors you should check for.

Capital expenditures buried in operating activities: a subtle but serious example of misclassification

Another real example of common mistakes in cash flow statements is pushing capital expenditures (CapEx) into operating activities.

Consider a fast-growing SaaS company that spends heavily on:

• Internal software development
• Office build-outs for new locations
• Data center equipment

Under GAAP, a lot of this spending should be capitalized and shown as an investing outflow. But in practice, you sometimes see:

• All software development costs expensed immediately and left in operating activities
• Leasehold improvements recorded as “repairs and maintenance” in operating activities

Now, technically, whether a cost is expensed or capitalized starts on the income statement. But once it’s capitalized, the cash outflow belongs in investing, not operating. When a company incorrectly leaves these outflows in operating activities, it understates investing cash outflows and makes operating cash flow look weaker than it really is.

In a 2024 private equity deal I reviewed, a target company’s operating cash flow looked terrible on first pass. After digging in, we found that roughly 30% of their data center CapEx had been run through operating expenses instead of being capitalized. The business wasn’t nearly as cash-poor as the original cash flow statement suggested—the cash was just misclassified. This is one of the best examples of why you should always reconcile big line items in operating cash flow with the fixed asset rollforward.

If you want to check textbook treatment of investing vs. operating cash flows, the FASB and educational resources from schools like Harvard Business School (e.g., their accounting and financial statement primers at hbs.edu) are good starting points.

Ignoring non-cash items: depreciation, stock-based comp, and gains on sale

Some of the most common examples of common mistakes in cash flow statements are simply omissions—items that should be added back or subtracted but never make it into the reconciliation.

Depreciation and amortization left out of the reconciliation

In the indirect method, you start with net income and add back non-cash expenses like depreciation and amortization. But with complex ERP systems and multiple ledgers, it’s surprisingly easy for one depreciation schedule to be left out.

Real example: a logistics company with multiple asset subledgers (trucks, trailers, warehouses) only pulled depreciation from the main fixed asset module when building the cash flow statement. Depreciation from leased trucks recorded in a separate module was never added back. The result: operating cash flow was understated by about 8% simply because one non-cash expense was ignored.

Stock-based compensation skipped entirely

Stock-based compensation is another example of a non-cash expense that must be added back in the operating section. High-growth tech companies in 2024–2025 often have large stock-based comp expense, especially with retention grants after layoffs.

If the preparer:

• Correctly records stock-based comp on the income statement, but
• Fails to add it back in the cash flow reconciliation,

then operating cash flow looks weaker than it should. For investor analysis, this can materially change valuation metrics like price-to-cash-flow. You often see this mistake in earlier-stage companies that are still maturing their reporting processes.

Gains and losses on asset sales mishandled

Here’s another example of common mistakes in cash flow statements: double-counting or ignoring gains and losses on sale of assets.

When a company sells equipment:

• The cash proceeds go to investing activities.
• The gain or loss is a non-cash income statement item that should be removed from operating activities.

Common errors include:

• Forgetting to subtract a gain from net income in the operating section.
• Forgetting to add back a loss.
• Recording the full proceeds in operating activities instead of investing.

This can make operating cash flow look artificially strong in a year when the company is selling off assets to stay afloat. It’s one of the best examples of how to spot distress masked by sloppy cash flow reporting.

For more technical guidance on non-cash adjustments, the AICPA and academic resources from MIT and other universities (see accounting teaching materials at mit.edu) provide detailed examples.

Working capital confusion: inventory, receivables, and payables

Working capital adjustments are fertile ground for mistakes. Some of the most frequent real examples of common mistakes in cash flow statements involve:

• Getting the sign wrong on changes in receivables or payables
• Ignoring certain working capital accounts entirely
• Mixing up current and noncurrent portions of balances

Sign errors in receivables and payables

Take a distributor whose accounts receivable increased by $5 million year-over-year. That increase means the company used cash (customers haven’t paid yet), so the change should be a negative adjustment in operating activities.

A common example of error: the preparer sees “increase in receivables, \(5 million” and enters +\)5 million in the operating section. Suddenly, operating cash flow is overstated by $10 million relative to the correct figure (because the sign is flipped).

The same happens with payables. A decrease in accounts payable is a use of cash, but people frequently treat it as a source.

Missing working capital accounts

In more complex businesses, there are many current accounts beyond the big three of receivables, inventory, and payables:

• Deferred revenue
• Accrued expenses
• Prepaid expenses
• Taxes payable

Real example: a subscription-based software company in 2024 had rapidly growing deferred revenue as customers prepaid for annual plans. The increase in deferred revenue should have been a positive adjustment to operating cash flow. Instead, the entire deferred revenue balance was treated as a “non-cash item” and left out of the reconciliation. The company looked far less cash-generative than it actually was.

The SEC’s Division of Corporation Finance has issued comment letters to public companies over exactly these kinds of working capital presentation issues, reinforcing that all significant current asset and liability changes must be reflected in the operating section.

Non-cash financing activities wrongly shown as cash flows

Another important example of common mistakes in cash flow statements is recording non-cash financing activities as if they were actual cash movements.

Typical non-cash financing transactions include:

• Converting debt to equity
• Acquiring equipment via finance leases
• Issuing shares to acquire another company (no cash changes hands)

These should be disclosed in the notes or in a supplemental schedule, not as cash inflows or outflows.

Real example: a company that converted $10 million of convertible debt into equity recorded:

• A $10 million financing outflow for “debt repayment,” and
• A $10 million financing inflow for “equity issuance.”

Net cash impact: zero. But the cash flow statement showed $20 million of phantom financing activity. Debt ratios and cash coverage metrics looked dramatically different to anyone scanning the financing section without reading the footnotes.

Accounting standards (see FASB ASC 230 summaries and educational explanations at fasb.org) are clear that these are non-cash and should not run through the main cash flow sections.

Foreign currency translation and cash flow errors in global companies

For multinational businesses, some of the best examples of cash flow mistakes involve foreign currency translation.

Common issues include:

• Ignoring exchange rate effects on cash and cash equivalents
• Misclassifying translation adjustments as operating or financing cash flows
• Using inconsistent exchange rates across the statement

Real example: a U.S.-based company with euro and yen subsidiaries prepared its cash flow statement using:

• Average annual exchange rates for income statement items
• Period-end rates for balance sheet items

That part was fine. The mistake came when the preparer tried to “plug” the difference between the calculated change in cash and the translated cash balance into operating activities instead of using the separate line for “Effect of exchange rate changes on cash and cash equivalents.”

The result: operating cash flow absorbed all the translation noise from volatile FX movements in 2022–2023, making the business look far more unpredictable than it actually was.

IFRS and U.S. GAAP both require that foreign currency translation effects on cash be shown separately, not buried in operating, investing, or financing activities. Academic resources from institutions like Columbia Business School and Harvard often highlight these examples of foreign currency errors in advanced accounting courses.

Inconsistent classification of leases and debt repayments

Lease accounting changes over the last few years (ASC 842 in the U.S., IFRS 16 internationally) created a new wave of examples of common mistakes in cash flow statements.

Under these standards, many leases that used to be off-balance-sheet are now recognized as right-of-use assets with lease liabilities. Cash payments for leases are split into:

• Interest portion
• Principal portion

Companies frequently:

• Put the entire lease payment in operating activities, or
• Put the entire payment in financing activities,

instead of splitting them.

Real example: a retailer with hundreds of store leases reported all lease payments as operating cash outflows, even though a significant portion was effectively principal repayment of the lease liability. This made operating cash flow look weaker and financing cash flows artificially small.

A similar issue appears with debt:

• Interest payments should be operating (under U.S. GAAP).
• Principal repayments are financing.

When companies lump both together in one section, trend analysis becomes unreliable. Analysts comparing 2021–2024 periods have to manually adjust to get apples-to-apples operating cash flow.

Guidance and examples of lease cash flow treatment can be found in educational materials from organizations like the Governmental Accounting Standards Board (GASB) at gasb.org and university accounting departments.

Real examples of red flags analysts should watch for

When you’re reviewing a cash flow statement, some patterns are classic red flags. The best examples of warning signs that suggest common mistakes in cash flow statements include:

• Operating cash flow that moves in the opposite direction of earnings without a clear working capital or one-time explanation
• Huge swings in investing cash flows from year to year with no corresponding change in CapEx or acquisition activity in the notes
• Financing cash flows dominated by non-cash-looking items, like large “debt restructuring” entries with no impact on total debt
• No line for foreign exchange effects in a company that clearly operates in multiple currencies
• Missing or tiny working capital adjustments in a business that obviously holds significant inventory and receivables

These are not proof of fraud, but they are examples of situations where you should assume there may be common mistakes in the cash flow statement and dig deeper.

Regulators, auditors, and academic researchers all emphasize the importance of cash flow quality. Research from leading business schools (for example, accounting and financial statement analysis courses at harvard.edu) often uses real examples to show how misclassified or incomplete cash flow statements can mislead investors even when the income statement looks polished.

FAQs: examples of common mistakes in cash flow statements

Q1: What are some real examples of common mistakes in cash flow statements for small businesses?
For small businesses, a frequent example of error is treating owner draws or distributions as operating expenses instead of financing outflows. Another common example is ignoring changes in accounts payable and receivable entirely, so net income and operating cash flow end up identical, which almost never reflects reality.

Q2: Can you give an example of a misclassified cash flow that investors should watch for?
A classic example of misclassification is recording proceeds from a bank loan as operating cash inflow. That inflates operating cash flow and hides the fact that the business is relying on debt to fund operations. Proceeds from loans belong in financing activities.

Q3: Are non-cash expenses always added back in the operating section?
Yes, under the indirect method, non-cash expenses such as depreciation, amortization, and stock-based compensation should be added back to net income in the operating section. A common example of a mistake is forgetting to add back stock-based compensation, which understates operating cash flow.

Q4: What examples include foreign currency issues in cash flow statements?
Examples include failing to show the effect of exchange rate changes on cash as a separate line, or using inconsistent exchange rates when translating foreign cash balances. Both can create artificial volatility in operating cash flow.

Q5: How can I quickly check for examples of common mistakes in cash flow statements when reviewing a new company?
Start by comparing net income to operating cash flow over several years. Then scan for big swings in working capital adjustments, odd classification of interest and dividends, and any large gains or losses on asset sales. These are often the best examples of where errors or aggressive presentation choices show up first.