Last reviewed: July 2026.
Cash Flow Statement Preparation: Step-by-Step IAS 7 Guide is a practical guide designed to connect current accounting requirements with clear preparation steps, calculations and review controls.
What the statement of cash flows explains
A statement of cash flows explains why cash and cash equivalents changed during an accounting period. Profit alone cannot answer that question because revenue may be recognised before collection, expenses may be recorded before payment, and major asset purchases or financing transactions may not pass through operating profit. IAS 7 therefore separates cash movements into operating, investing and financing activities so users can assess liquidity, financial flexibility and the entity’s ability to generate cash.
Step 1: confirm the opening and closing cash balances
Begin with the cash and cash-equivalent balances in the opening and closing statements of financial position. Agree bank accounts to reconciliations, confirm petty cash, and identify short-term highly liquid investments that meet the cash-equivalent definition. Bank overdrafts may be included within cash and cash equivalents only when they are repayable on demand and form an integral part of cash management. The difference between opening and closing cash is the amount the completed statement must explain.
Step 2: build a transaction mapping schedule
Export the general ledger and map each cash movement to operating, investing or financing. Do not classify by account name alone. A payment to a supplier is normally operating, the purchase of equipment is investing, and proceeds from a new loan are financing. Create a separate list for non-cash transactions, transfers between cash accounts and reconciling items. This schedule becomes the audit trail supporting every line in the statement.
Step 3: choose the operating cash-flow method
IAS 7 permits the direct method or the indirect method for operating activities. The direct method presents major classes of cash receipts and cash payments. The indirect method starts from profit and adjusts for non-cash items, accruals, deferrals, working-capital movements and investing or financing items included in profit. The direct method can be more intuitive, while the indirect method is often easier to prepare from accrual accounting records.
Step 4: prepare operating activities
Under the indirect method, start from the required profit subtotal and reverse items such as depreciation, impairment and unrealised gains. Remove gains or losses connected with investing activities, then adjust for changes in inventories, trade receivables, trade payables and other operating balances. An increase in receivables normally reduces operating cash because revenue has not yet been collected. An increase in payables normally increases operating cash because expenses have not yet been paid.
Step 5: prepare investing activities
Investing activities normally include cash paid to acquire property, plant and equipment, intangible assets and long-term investments, together with cash received on disposal. Use the fixed-asset register, purchase ledger and disposal records rather than relying only on the change in carrying amount. Depreciation, revaluation, impairment and assets acquired without cash can all change carrying amounts without creating an investing cash flow.
Step 6: prepare financing activities
Financing activities include transactions that change the size or composition of equity and borrowings. Typical examples are proceeds from issuing shares, new borrowings, repayment of loan principal and payments to owners. Reconcile each borrowing balance from opening to closing and separate cash movements from non-cash changes such as foreign-exchange effects, lease additions or debt converted into equity.
Step 7: identify non-cash transactions
Non-cash investing and financing transactions are excluded from the statement itself but may require disclosure elsewhere. Examples include acquiring an asset through a lease, issuing shares as purchase consideration and converting debt into equity. Keeping a dedicated non-cash schedule prevents these transactions from being incorrectly included as cash flows while ensuring that users still receive relevant information.
Worked reconciliation example
Assume operating cash inflow is 120,000, equipment purchases are 70,000, disposal proceeds are 8,000, a new loan provides 50,000 and loan principal repayments are 20,000. The net increase in cash is 88,000: operating 120,000 plus investing outflow 62,000 plus financing inflow 30,000. If opening cash was 12,000, closing cash should be 100,000. Any difference signals an omitted, duplicated or misclassified movement.
Final review controls
- Agree opening and closing cash to reconciled ledger balances.
- Trace every material cash-flow line to a supporting schedule.
- Check consistency of interest and dividend classification under the applicable reporting requirements.
- Reconcile financing liabilities and explain non-cash changes.
- Compare unusual movements with the statement of financial position and notes.
Common preparation errors
Frequent errors include treating depreciation as a cash outflow, using the movement in fixed-asset carrying amount as equipment purchases, omitting cash acquired with a subsidiary, including transfers between bank accounts, and failing to separate loan principal from interest. Another common problem is forcing the statement to reconcile by inserting an unexplained balancing line. The correct response is to return to the transaction mapping and supporting schedules until the difference is identified.
How to organise the working papers
Maintain one lead schedule for each section and link every line to a detailed ledger extract. Use separate tabs for working capital, fixed assets, borrowings, leases, tax and foreign currency. Each schedule should show opening balance, cash movement, non-cash movement and closing balance. Reviewer sign-off should confirm classification, mathematical accuracy and agreement with the financial statements.
Analytical review
Compare operating cash flow with profit, revenue growth and working-capital movements. Persistent profit without operating cash may indicate slow collections, inventory accumulation or aggressive revenue recognition. Compare investing outflows with capital-expenditure plans and financing flows with covenant and maturity disclosures. Large unexplained changes should be investigated before the statement is approved.
Related Accounting Support guides
Use the cash-flow definitions guide to confirm classification terms, the indirect-method guide for operating adjustments, and the financial-statement objective guide to connect cash information with user decisions.
Authoritative references
See the IAS 7 Statement of Cash Flows and IFRS 18 Presentation and Disclosure in Financial Statements for current presentation and classification requirements.