Last reviewed: July 2026.
A statement of cash flows explains how cash and cash equivalents changed during a reporting period. Under IAS 7, cash flows are classified as operating, investing or financing activities. The statement should reconcile opening cash to closing cash and should be read with the income statement and statement of financial position.
This guide provides a practical preparation sequence, explains the direct and indirect methods and highlights the adjustments that commonly cause errors.
1. Confirm cash and cash equivalents
Start with the opening and closing balances. Cash normally includes cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant value risk. An investment is not a cash equivalent merely because it is easy to sell.
Reconcile the statement’s closing amount to the equivalent items in the statement of financial position. Investigate restricted balances, overdrafts and foreign-currency effects before using them.
2. Choose the operating cash-flow method
The direct method presents major classes of gross cash receipts and payments, such as cash collected from customers and cash paid to suppliers and employees. The indirect method starts with a profit subtotal and adjusts for non-cash items, accruals, working-capital changes and items associated with investing or financing cash flows.
The IFRS Foundation’s IAS 7 overview describes both methods. ACCA’s cash-flow preparation article demonstrates common calculations.
3. Prepare operating activities using the indirect method
A typical reconciliation may:
- add back depreciation, amortisation, impairment and other non-cash expenses;
- remove gains or losses whose cash effect appears in investing or financing activities;
- deduct increases in inventory and trade receivables;
- add increases in trade payables and other operating liabilities;
- reflect cash interest, taxes and other items according to the applicable requirements and policy.
An increase in an operating asset normally uses cash. An increase in an operating liability normally supports cash. Apply the rule only after confirming that the balance relates to operating activity and that no acquisition, disposal, foreign-exchange or other non-cash movement is included.
4. Calculate investing cash flows
Investing activities generally include cash paid to acquire property, plant and equipment and cash proceeds from disposals. The movement in an asset balance is not automatically the cash purchase. Reconcile opening cost, cash additions, non-cash additions, disposals, revaluations and closing cost.
For example, if equipment cost increases by 300 but 80 was acquired through a lease and equipment costing 50 was disposed of, the cash purchase must be derived from the full asset reconciliation rather than the closing movement alone.
5. Calculate financing cash flows
Financing activities change contributed equity and borrowings. Typical items include proceeds from share issues, new loans, repayment of principal and distributions to owners. Reconcile financing liabilities from opening to closing, separating cash flows from non-cash changes such as lease additions, exchange movements and fair-value changes.
6. Complete the statement in a controlled sequence
| Step | What to do | Typical evidence |
|---|---|---|
| 1. Reconcile cash | Confirm opening and closing cash and cash equivalents. | Statements of financial position, bank records and cash-equivalent schedules. |
| 2. Build operating cash flow | Use direct receipts/payments or reconcile operating profit to cash. | Profit statement, working-capital balances and adjustment notes. |
| 3. Calculate investing flows | Identify cash purchases and disposals of long-term assets and investments. | PPE accounts, disposal records and acquisition notes. |
| 4. Calculate financing flows | Identify equity proceeds, borrowings, repayments and distributions. | Loan accounts, share issues, dividend records and financing-liability reconciliation. |
| 5. Complete disclosures | Explain non-cash transactions and reconcile financing liabilities. | Lease additions, foreign-exchange movements and other non-cash changes. |
Worked indirect-method example
Assume operating profit is 240 CU, depreciation is 40 CU, receivables increase by 25 CU, inventory decreases by 12 CU and payables decrease by 8 CU. Cash generated from operations is:
- Operating profit: 240 CU
- Add depreciation: 40 CU
- Subtract receivables increase: 25 CU
- Add inventory decrease: 12 CU
- Subtract payables decrease: 8 CU
- Cash generated from operations: 259 CU
Taxes and other separately presented operating cash flows would then be considered to reach net cash from operating activities.
Common preparation errors
- treating every balance-sheet movement as a cash flow;
- using the wrong sign for working-capital changes;
- including depreciation as an investing cash outflow;
- failing to remove disposal gains or losses from the operating reconciliation;
- including non-cash asset acquisitions in the statement;
- failing to reconcile opening and closing cash;
- mixing entity policy choices across periods without disclosure.
Current IFRS 18 context
IFRS 18 amended IAS 7. For periods to which IFRS 18 applies, entities using the indirect method use the required operating-profit subtotal as the starting point and apply revised requirements for interest and dividend cash-flow classification. Transition planning should therefore consider presentation, systems and comparative information.
How to analyse the completed statement
Do not judge performance from the total cash movement alone. An increase may come from borrowing or asset sales rather than healthy operations. ACCA’s cash-flow analysis guidance recommends examining operating generation, capital expenditure and financing together.
Use the related guides on classifying cash flows, links with the other primary statements and financial ratio analysis.
Final checklist
- Opening and closing cash reconcile.
- Operating adjustments contain no duplicated cash flow.
- Investing and financing calculations use full account reconciliations.
- Non-cash transactions are excluded and disclosed.
- Signs, subtotals and classifications are consistent.
- Required financing-liability and cash-equivalent disclosures are complete.
Key takeaway
Prepare the cash-flow statement by reconciling, not guessing. Start with verified cash, calculate each section from supporting accounts, separate cash from non-cash movements and confirm that net movement explains the change from opening to closing cash.