Last reviewed: July 2026.
A cash flow statement becomes much easier to prepare when its definitions are understood precisely. IAS 7 distinguishes cash and cash equivalents from other financial assets and classifies movements according to operating, investing and financing activities.
This glossary-style guide explains the main terms, common judgement areas and the way the definitions connect to the statement of financial position and profit or loss.
Cash
Cash includes cash on hand and demand deposits. A demand deposit is generally available on demand and used as part of normal cash management, but contractual restrictions and unusual arrangements require careful analysis.
Petty cash and current bank accounts are typical examples. A balance called cash in an internal ledger is not automatically cash for IAS 7 if access is substantially restricted.
Cash equivalents
Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. They are held to meet short-term cash commitments rather than for investment return.
An investment’s original maturity is important. A three-month deposit acquired close to issue may qualify, while a long-term instrument with only three months remaining when purchased normally requires additional analysis.
Cash flows
Cash flows are inflows and outflows of cash and cash equivalents. Transfers between items that are themselves cash or cash equivalents are not presented as cash flows because they are part of cash management.
Moving money from a current account to a qualifying short-term deposit therefore changes the composition of cash resources without changing total cash and cash equivalents.
Operating activities
Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing. They commonly include cash received from customers, cash paid to suppliers and employees, and many operating taxes.
The operating category helps users understand the cash generated by the business model before major investing and financing decisions.
Investing activities
Investing activities involve acquiring and disposing of long-term assets and other investments not included in cash equivalents. Purchases and sales of property, plant and equipment are common examples.
Only cash movements are presented. Acquiring equipment through a lease or issuing shares to purchase a business is a significant non-cash transaction and is disclosed elsewhere rather than shown as a cash inflow and outflow.
Financing activities
Financing activities change the size or composition of contributed equity and borrowings. Examples include cash proceeds from issuing shares, obtaining loans, repaying principal and certain distributions to owners.
Classification requires attention to the nature of the cash flow rather than the name of the account. A payment can include both principal and interest components with different presentation requirements.
Direct method
The direct method presents major classes of gross cash receipts and payments, such as receipts from customers and payments to suppliers and employees.
It gives users visible information about operating cash behaviour, but it requires reliable transaction-level classification or a robust derivation from accounting records.
Indirect method
The indirect method starts from a specified profit subtotal and adjusts for non-cash items, accrual movements and items whose cash effects belong to investing or financing activities.
Depreciation is added back because it reduced profit without using current-period cash. An increase in trade receivables is usually deducted because recognised revenue exceeded cash collected, subject to the detailed facts.
Non-cash transactions
Non-cash investing and financing transactions are excluded from the statement of cash flows because no cash or cash equivalent moved. However, they can materially affect capital structure and future cash commitments.
Examples include acquiring an asset through a lease, converting debt into equity and acquiring a subsidiary by issuing shares. Clear disclosure prevents users from confusing accounting activity with cash activity.
Restricted cash and cash-management judgement
Restrictions do not always mean an amount ceases to be cash, but the nature and duration of the restriction matter. Entities should consider availability, purpose, contractual terms and presentation requirements.
Bank overdrafts may form part of cash management in limited circumstances when they are repayable on demand and fluctuate between positive and overdrawn positions. A stable financing facility is usually financing rather than a cash-equivalent component.
Interest, dividends and taxes
Interest, dividends and income taxes require consistent classification under the applicable requirements and facts. IFRS 18-related amendments affect presentation and classification considerations for entities applying the revised requirements.
The policy should be documented and applied consistently. Mixed tax cash flows may need allocation where they can be specifically identified with investing or financing transactions.
Reconciliation to the statement of financial position
Entities reconcile the cash and cash-equivalent amount in the statement of cash flows to the corresponding reported balances. Differences can arise from overdraft treatment, restricted balances or line-item aggregation.
A strong reconciliation identifies every bank account, petty-cash balance and qualifying investment, then explains exclusions and foreign-exchange effects.
Foreign-currency cash flows
Foreign-currency cash flows are translated using exchange rates at the dates of the cash flows, with practical approximations where appropriate. Exchange differences on cash and cash equivalents are presented separately to reconcile opening and closing balances.
That separate line is not itself an operating, investing or financing cash flow. It explains the effect of exchange-rate changes on existing cash balances.
Related Accounting Support guides
- Statement of Cash Flows: IAS 7 Practical Guide
- How to Prepare a Statement of Cash Flows under IAS 7
- How the Cash Flow Statement Links to Other Statements
Official sources
- IFRS Foundation: IAS 7 Statement of Cash Flows
- IFRS Foundation: IFRS 18 Presentation and Disclosure in Financial Statements
Key takeaway
Precise definitions prevent classification errors. Build the statement from verified cash movements, document judgement over cash equivalents and overdrafts, disclose non-cash transactions and reconcile the closing balance to the statement of financial position.