Cash Flow Statement: Format, Example, Types & How to Prepare It
Cash Flow Statement: Format, Example, Types & How to Prepare It
A cash flow statement shows how cash and cash equivalents moved into and out of a business during a specific accounting period. It is one of the three major financial statements. Together with the income statement and the balance sheet, it helps users understand a business's performance and financial position. While the income statement focuses mainly on income, expenses and profit, the cash flow statement explains the movement in cash.
Quick answer: A cash flow statement reports the cash and cash equivalents that entered and left a business during a period. Under IAS 7 it is split into operating, investing and financing activities, and the net change reconciles opening cash to closing cash.
A business can report a profit and still face a shortage of cash. This can happen when sales are made on credit, customers delay payments, inventory absorbs cash, or large payments become due before the business collects its receivables. That is why understanding cash flow is essential for accountants, managers, business owners, investors and accounting students.
Under IAS 7 Statement of Cash Flows, cash flows are classified into three major categories: operating activities, investing activities and financing activities.
Cash flow statement at a glance
If you are new to financial reporting, first understand the three main financial statements and how they work together.
What Is a Cash Flow Statement?
A cash flow statement, also called a statement of cash flows, reports the movement of cash and cash equivalents into and out of a business during a particular accounting period.
In simple terms, it answers three important questions:
- Where did the business receive cash from?
- Where did the business spend cash?
- Why did the cash balance increase or decrease?
For example, suppose a company starts the month with $20,000 in cash. During the month it receives $70,000 from customers, pays $45,000 to suppliers and employees, purchases equipment for $15,000 and receives a $10,000 bank loan.
The cash flow statement helps explain these movements and shows how the company's closing cash balance was reached: $20,000 + $70,000 − $45,000 − $15,000 + $10,000 = $40,000.
IAS 7 defines cash as cash on hand and demand deposits, while cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent only when it has a short maturity, for example three months or less from the date of acquisition. In some cases, bank overdrafts that are repayable on demand and form an integral part of an entity's cash management are also included in cash and cash equivalents.
Why Is the Cash Flow Statement Important?
Profit is important, but profit alone does not tell you whether a business has enough cash to pay its immediate obligations.
The cash flow statement provides information that helps users evaluate liquidity, financial flexibility and the ability of a business to generate cash.
It is particularly useful for understanding whether normal business operations are generating cash or whether the business is depending on borrowing or asset sales to maintain liquidity.
A business may have strong reported sales but weak cash flow if customers are taking a long time to pay. Similarly, a profitable business may experience temporary cash pressure after purchasing inventory or equipment.
The cash flow statement therefore provides an important connection between accounting profit and actual cash movement.
Who Uses a Cash Flow Statement?
Different users read the same statement for different reasons:
- Business owners and management: to plan payments, manage liquidity and decide whether the business can afford new investment.
- Investors: to assess the ability of the business to generate cash and the cash needs it has.
- Lenders and creditors: to judge whether the business can service its debt and pay suppliers on time.
- Accountants and auditors: to check classification of cash flows and the reconciliation with the balance sheet.
- Students: to see how profit, the balance sheet and cash movements connect.
Cash Flow vs Profit: What Is the Difference?
One of the most important accounting concepts for beginners is that profit is not the same as cash.
Profit is generally calculated by comparing recognized revenue with recognized expenses. Cash flow focuses on actual movements of cash and cash equivalents.
For example, assume a company sells goods worth $50,000 on credit. The sale may contribute to revenue and profit even though the customer has not yet paid.
One credit sale, two different timings
Profit is recognized when the sale is made. Cash arrives only when the customer pays.
The company may therefore report a profit while receiving no cash from that particular sale during the period.
This is one reason why the Profit and Loss Statement should be analyzed together with the cash flow statement rather than treated as a complete picture of liquidity.
| Profit | Cash Flow |
|---|---|
| Measures income and expenses recognized during a period. | Measures cash and cash-equivalent inflows and outflows. |
| Can include credit sales. | Focuses on actual cash movement. |
| Includes non-cash expenses such as depreciation. | Adjusts for non-cash items when using the indirect method. |
| Helps evaluate profitability. | Helps evaluate liquidity and cash generation. |
For a deeper understanding of these timing differences, see the guide on cash vs accrual accounting.
Three Main Sections of a Cash Flow Statement
The cash flow statement is generally divided into three major sections:
- Operating activities
- Investing activities
- Financing activities
This classification is required by IAS 7 and helps users understand the different sources and uses of cash within a business.
The word "types" is commonly used for these three categories of cash flow. The direct and indirect methods covered later are not different types of statements. They are two ways of presenting operating cash flow.
1. Operating Activities
Operating activities are the principal revenue-producing activities of a business and other activities that are not investing or financing activities.
Typical operating cash flows include:
- Cash received from customers.
- Cash paid to suppliers.
- Cash paid to employees.
- Cash payments for operating expenses.
- Cash receipts from fees, commissions or other operating revenue.
- Income tax payments, generally operating unless they can be specifically identified with investing or financing activities.
- Interest and dividend cash flows, where the entity's classification policy places them in operating activities (see the section on interest and dividends below).
For many businesses, operating cash flow is particularly important because it indicates whether the core business activities are generating sufficient cash.
2. Investing Activities
Investing activities generally relate to the acquisition and disposal of long-term assets and investments that are not cash equivalents.
Examples include:
- Purchase of machinery.
- Purchase of buildings.
- Purchase of long-term investments.
- Sale of property, plant and equipment.
- Sale of qualifying investments.
- Cash paid to acquire another business, subject to applicable accounting requirements.
Investing cash flow is often negative when a business is investing heavily in equipment, technology, factories or other long-term assets.
A negative investing cash flow is therefore not automatically a sign of poor performance. The reason for the cash outflow must be investigated.
3. Financing Activities
Financing activities are activities that result in changes in the size and composition of contributed equity and borrowings.
Common examples include:
- Cash received from issuing shares.
- Cash received from borrowings.
- Repayment of loan principal.
- Principal portion of lease payments under IFRS 16.
- Dividends paid to shareholders or payments to owners, where classified as financing under the applicable requirements.
Financing cash flow helps users understand how a business funds its operations and investments.
For example, a company may have negative operating cash flow but positive financing cash flow because it has obtained a new bank loan.
Interest and Dividends: A Common Classification Question
Interest and dividends are among the items most often misclassified. Under IAS 7 as it stands before IFRS 18 applies, an entity other than a financial institution can choose a classification policy for these cash flows, but must apply it consistently from period to period. IFRS 18 removes these options for many entities. The table compares the two positions for an entity without specified main business activities:
| Cash Flow | IAS 7 before IFRS 18 (policy choice) | When IFRS 18 applies (no specified main business activities) |
|---|---|---|
| Interest paid | Operating or financing | Financing |
| Interest received | Operating or investing | Investing |
| Dividends paid | Operating or financing | Financing |
| Dividends received | Operating or investing | Investing |
Financial institutions usually classify interest paid, interest received and dividends received as operating cash flows.
Entities with specified main business activities follow a different rule under IFRS 18. These are entities that, as a main business activity, invest in particular types of assets or provide financing to customers, such as banks and other lenders. They always classify dividends paid as financing. Their interest paid, and their interest and dividends received, follow the classification of the related income and expense in the income statement. Whether an entity has specified main business activities is a new assessment that requires judgment, and it is made at the level of the reporting entity (for consolidated statements, the group as a whole).
US GAAP follows a different approach: interest paid, interest received and dividends received are generally operating cash flows, while dividends paid are financing.
Because of these differences, always check which reporting framework and which classification policy an entity applies before comparing its cash flow statement with another entity's.
Cash Flow Statement Format
A simplified cash flow statement format can be presented as follows:
| Cash Flow Statement | Amount |
|---|---|
| Cash flows from operating activities | |
| Cash received from customers | $XXX |
| Cash paid to suppliers and employees | ($XXX) |
| Other operating cash flows | $XXX |
| Net cash from operating activities | $XXX |
| Cash flows from investing activities | |
| Purchase of property or equipment | ($XXX) |
| Proceeds from sale of assets | $XXX |
| Net cash from investing activities | $XXX |
| Cash flows from financing activities | |
| Proceeds from borrowings | $XXX |
| Repayment of borrowings | ($XXX) |
| Net cash from financing activities | $XXX |
| Net increase or decrease in cash | $XXX |
| Opening cash and cash equivalents | $XXX |
| Closing cash and cash equivalents | $XXX |
Cash Flow Statement Template
Use the layout below as a fill-in template. It uses the direct method for operating activities.
| [Company name] Cash Flow Statement for the year ended [date] |
Amount |
|---|---|
| A. Cash flows from operating activities | |
| Cash received from customers | |
| Cash paid to suppliers | |
| Cash paid to employees | |
| Other operating cash flows | |
| Net cash from operating activities | |
| B. Cash flows from investing activities | |
| Purchase of property and equipment | |
| Proceeds from sale of property and equipment | |
| Purchase of investments | |
| Proceeds from sale of investments | |
| Net cash from investing activities | |
| C. Cash flows from financing activities | |
| Proceeds from loans | |
| Repayment of loans | |
| Proceeds from issue of shares | |
| Dividends paid (if classified as financing) | |
| Net cash from financing activities | |
| Net increase or (decrease) in cash and cash equivalents (A + B + C) | |
| Opening cash and cash equivalents | |
| Closing cash and cash equivalents |
For the indirect method, start the operating section with profit or loss and adjust it as shown in the indirect method example below. Classify interest and dividends according to the reporting framework and the entity's policy. Income taxes are generally operating cash flows unless they can be specifically identified with investing or financing activities.
Cash Flow Statement Formula
The statement rests on two simple formulas. The first gives the net change in cash. The second gives the closing balance.
Cash flow statement formulas
Net change in cash = Operating cash flow + Investing cash flow + Financing cash flow
Closing cash = Opening cash + Net change in cash
Enter outflows as negative numbers. For ABC Traders below: $30,000 + (−$20,000) + $25,000 = $35,000, and $15,000 + $35,000 = $50,000. If an entity holds cash in foreign currencies, IAS 7 also requires the effect of exchange rate changes to be shown as a separate reconciling item. The example ignores it for simplicity.
Direct Method vs Indirect Method
IAS 7 permits an entity to report cash flows from operating activities using either the direct method or the indirect method. Only the presentation of operating cash flow differs. The investing and financing sections, and the net change in cash, are the same under both methods.
Two routes to the same operating cash flow
Direct method
Starts from cash receipts and payments
- Cash received from customers
- Less cash paid to suppliers
- Less cash paid to employees
- Less other operating cash payments
- Net cash from operating activities
Indirect method
Starts from profit or loss
- Profit or loss for the period
- Add back non-cash items such as depreciation
- Adjust for changes in receivables, inventory and payables
- Remove investing and financing items, such as gains on asset sales
- Net cash from operating activities
Direct Method
The direct method presents major classes of gross cash receipts and gross cash payments.
A simplified example might look like this:
- Cash received from customers: $100,000
- Cash paid to suppliers: ($45,000)
- Cash paid to employees: ($20,000)
- Cash paid for other operating expenses: ($10,000)
- Net operating cash flow: $25,000
The direct method shows the major sources and uses of operating cash more explicitly. IAS 7 encourages entities to use it because it can help users estimate future cash flows. In practice, however, many entities use the indirect method because it can be prepared from existing profit and balance sheet data.
Indirect Method
The indirect method starts with profit or loss and then adjusts for non-cash items and relevant changes in operating assets and liabilities. Once IFRS 18 applies, the starting point becomes operating profit or loss.
Typical adjustments can include:
- Depreciation and other non-cash expenses.
- Changes in trade receivables.
- Changes in inventory.
- Changes in trade payables.
- Other non-cash items.
- Items whose cash flows belong to investing or financing activities, such as gains or losses on the sale of equipment.
Both methods are permitted under IAS 7. A worked indirect-method example is included in the next section.
Cash Flow Statement Example With Numbers
Consider the following simplified example for ABC Traders:
| Transaction | Cash Impact | Category |
|---|---|---|
| Cash collected from customers | $80,000 | Operating |
| Cash paid to suppliers | ($35,000) | Operating |
| Employee payments | ($15,000) | Operating |
| Purchase of machinery | ($20,000) | Investing |
| Bank loan received | $30,000 | Financing |
| Loan principal repaid | ($5,000) | Financing |
Operating cash flow: $80,000 − $35,000 − $15,000 = $30,000
Investing cash flow: −$20,000
Financing cash flow: $30,000 − $5,000 = $25,000
Net increase in cash: $30,000 − $20,000 + $25,000 = $35,000
If opening cash was $15,000, the closing cash would therefore be:
$15,000 + $35,000 = $50,000
This simplified example demonstrates that the closing cash balance is the result of the combined effect of operating, investing and financing activities.
ABC Traders: how cash moved from $15,000 to $50,000
Running cash balance: $15,000, then $45,000, then $25,000, then $50,000. Floating bars show how each section changed cash. Bars are drawn to the same scale, with full height equal to $50,000.
The Same Example Using the Indirect Method
The table above uses the direct method for operating activities. To show the indirect method with the same result, assume the following illustrative figures for ABC Traders: sales of $100,000, all on credit, with $20,000 still uncollected at the end of the period; operating expenses of $55,000 before depreciation, of which $5,000 remain unpaid; depreciation of $4,000 on the new machinery; and, to keep the example simple, no interest or tax.
Profit for the period is therefore $100,000 − $55,000 − $4,000 = $41,000. The reconciliation to operating cash flow is:
| Indirect Method: Operating Activities | Amount |
|---|---|
| Profit for the period | $41,000 |
| Add: Depreciation (non-cash expense) | $4,000 |
| Less: Increase in trade receivables | ($20,000) |
| Add: Increase in trade payables | $5,000 |
| Net cash from operating activities | $30,000 |
From profit of $41,000 to operating cash flow of $30,000
Running total: $41,000, then $45,000, then $25,000, then $30,000. Green bars increase cash flow and the red bar reduces it. Bars are drawn to the same scale, with full height equal to $50,000.
The result matches the direct method: cash collected from customers is $100,000 − $20,000 = $80,000, and cash paid for operating expenses is $55,000 − $5,000 = $50,000 ($35,000 to suppliers plus $15,000 to employees). Both methods give net operating cash flow of $30,000, so the net increase in cash remains $35,000.
Because this example contains no interest or tax, profit and operating profit are the same figure. In real financial statements, once IFRS 18 applies, the reconciliation would start from operating profit or loss instead.
How to Prepare a Cash Flow Statement Step by Step
Step 1: Determine Opening Cash and Cash Equivalents
Start with the cash and cash equivalents at the beginning of the reporting period.
Step 2: Choose the Method and Gather the Data
The data you need depends on the method used for operating activities.
- Direct method: review the accounting records and identify the transactions that actually affected cash or cash equivalents. Bank statements, cash books, payment records, receipts and accounting ledgers can help.
- Indirect method: start from the income statement and compare the opening and closing balance sheets to identify non-cash items and changes in receivables, inventory, payables and other operating balances.
For investing and financing activities, identify the cash paid and received for long-term assets, borrowings, equity and similar items under either method.
Step 3: Classify Cash Flows
Classify relevant cash movements into operating, investing and financing activities. Pay particular attention to interest and dividends, whose classification depends on the applicable reporting framework and requirements. Income taxes are generally classified as operating cash flows unless they can be specifically identified with investing or financing activities.
Step 4: Calculate Net Cash Flow for Each Section
Add the inflows and outflows within each category to calculate the net operating, investing and financing cash flows.
Step 5: Calculate the Net Change in Cash
Add the net cash flows from the three sections:
Net change in cash = Operating cash flow + Investing cash flow + Financing cash flow
Step 6: Reconcile Opening and Closing Cash
Add the net change in cash to opening cash and compare the result with the closing cash and cash equivalents.
IAS 7 requires entities to present a reconciliation of the amounts of cash and cash equivalents in the cash flow statement with the equivalent amounts reported in the statement of financial position.
A detailed understanding of the accounting cycle can also help when tracing transactions from source documents to financial statements.
How to Read and Analyze a Cash Flow Statement
Preparing the statement is only half the job. The next step is understanding what the numbers mean.
Positive Operating Cash Flow
Positive operating cash flow means operating activities generated more cash than they consumed during the period.
This can be useful evidence of cash generation from normal business activities, although one period should not be analyzed in isolation.
Negative Operating Cash Flow
Negative operating cash flow means the core operating activities consumed more cash than they generated during the period.
This may occur during a temporary growth phase, because of increased inventory purchases, delayed customer collections or other working-capital movements. Persistent negative operating cash flow deserves closer investigation.
Large Investing Outflows
Large investing outflows may indicate that a business is purchasing machinery, property, technology or other long-term assets.
The important question is not simply whether investing cash flow is negative, but why it is negative and whether the investment supports the company's future operations.
Large Financing Inflows
A large financing inflow may result from new borrowing or additional equity funding.
Financing can provide liquidity, but borrowing also creates repayment obligations and potentially interest costs.
Cash Flow Trends
Comparing cash flow across several periods can be more informative than looking at one month's or one year's figures.
- Is operating cash flow improving?
- Are customer collections becoming slower?
- Is inventory consuming more cash?
- Is the business relying increasingly on debt?
- Are capital expenditures increasing?
- Is closing cash adequate for expected obligations?
The table below gives a quick reading guide. These are possibilities, not conclusions, so always look at the reasons behind the numbers.
| Situation | What it may indicate |
|---|---|
| Positive operating cash flow | Core operations generated cash. |
| Negative operating cash flow | Operations consumed cash, for example because of growth, slow collections or inventory build-up. |
| Negative investing cash flow | The business may be investing in long-term assets. |
| Positive investing cash flow | The business may have sold assets or investments. |
| Positive financing cash flow | New borrowing or equity funding may have provided cash. |
| Negative financing cash flow | Loan repayments or dividends may be consuming cash. |
Working Capital and Cash Flow
Working capital movements can have a significant effect on operating cash flow.
For example, an increase in accounts receivable generally means that revenue has been recognized but some cash has not yet been collected. This can reduce operating cash flow under the indirect method.
An increase in inventory can also consume cash because the business has paid for goods that have not yet been sold.
Conversely, an increase in accounts payable can temporarily preserve cash because the business has received goods or services but has not yet paid the supplier.
The table below summarizes the direction of the most common adjustments when profit is reconciled to operating cash flow under the indirect method:
| Item | Change | Adjustment to Profit |
|---|---|---|
| Depreciation | Expense recognized | Add back |
| Trade receivables | Increase | Deduct |
| Trade receivables | Decrease | Add |
| Inventory | Increase | Deduct |
| Inventory | Decrease | Add |
| Trade payables | Increase | Add |
| Trade payables | Decrease | Deduct |
| Gain on sale of equipment | Included in profit | DeductProceeds are shown in investing activities. |
| Loss on sale of equipment | Included in profit | Add backProceeds are shown in investing activities. |
This is why cash flow analysis should be connected with the balance sheet rather than performed independently.
For beginners, the Balance Sheet for Beginners guide provides useful background on assets, liabilities and equity.
Cash Flow Statement and Other Financial Statements
The cash flow statement should not be treated as an isolated report.
The three major financial statements provide different but connected information:
| Financial Statement | Main Purpose |
|---|---|
| Income Statement | Shows revenue, expenses and profit or loss. |
| Balance Sheet | Shows assets, liabilities and equity at a specific date. |
| Cash Flow Statement | Shows movements in cash and cash equivalents during a period. |
The financial statements overview explains how these reports fit together.
For example, depreciation affects profit but does not represent a current cash payment. A credit sale can increase revenue and receivables without immediately increasing cash. A purchase of machinery can reduce cash while creating or increasing a long-term asset on the balance sheet.
Cash Flow Statement vs Cash Flow Forecast
Beginners often confuse these two documents. A cash flow statement reports what has already happened. A cash flow forecast estimates what is expected to happen.
| Feature | Cash flow statement | Cash flow forecast |
|---|---|---|
| Time focus | A completed period. | A future period. |
| Basis | Actual transactions, reconciled to the balance sheet. | Assumptions and estimates. |
| Main purpose | Reporting how cash actually moved. | Planning expected cash needs and shortfalls. |
| Status | A financial statement under IAS 7 for entities reporting under IFRS. | A management planning tool, usually prepared for internal use or for lenders. |
The two work best together: last period's actual cash flows help make the next forecast more realistic.
Common Cash Flow Statement Mistakes
1. Assuming Profit Equals Cash
This is one of the most common beginner mistakes. Profit and cash flow answer different questions.
2. Ignoring Credit Sales
Credit sales can increase revenue and receivables without producing an immediate cash inflow.
3. Treating Depreciation as a Cash Payment
Depreciation is generally a non-cash accounting expense. Under the indirect method, it is therefore adjusted when reconciling accounting profit to operating cash flow.
4. Misclassifying Asset Purchases
Cash paid to acquire long-term assets is generally an investing cash flow rather than an operating cash flow under IAS 7.
5. Forgetting Loan Principal Movements
Borrowing and repayment transactions can affect financing cash flows and should be properly reflected.
6. Ignoring Non-Cash Transactions
Transactions that do not require cash or cash equivalents are not presented as cash flows simply because they have accounting value. Material investing and financing transactions that do not involve cash or cash equivalents are separately disclosed rather than included as cash flows.
7. Getting the Sign of Working-Capital Adjustments Wrong
Under the indirect method, an increase in receivables or inventory is deducted from profit, while an increase in payables is added. Reversing these signs is a frequent exam and practice error.
8. Leaving Gains or Losses on Asset Sales in Operating Cash Flow
When equipment is sold, the cash proceeds belong in investing activities. Under the indirect method, the gain or loss included in profit must be removed from operating cash flow so the same item is not counted twice.
9. Failing to Reconcile the Closing Cash Balance
The cash flow statement should ultimately explain the movement from opening cash and cash equivalents to closing cash and cash equivalents.
For practical reconciliation work, accountants should also understand the purpose of a bank reconciliation statement.
Cash Flow Statement in ERP and Accounting Software
Modern accounting systems and ERP platforms can automate much of the data collection required for cash flow reporting.
An ERP system can connect sales, purchases, receivables, payables, inventory, banking, fixed assets and general ledger transactions. When transactions are correctly configured, these integrated records can support more efficient financial reporting.
However, automation does not eliminate the need for accounting judgment. Incorrect account mapping, wrong transaction classifications, duplicate entries or incomplete bank integrations can still produce misleading reports.
Businesses interested in automation can learn more from this guide to ERP accounting automation.
It is also useful to understand the difference between ERP and traditional accounting software when deciding how financial reporting should be managed.
IAS 7 and Cash Flow Statements
IAS 7 Statement of Cash Flows is the key IFRS standard governing cash flow statement presentation.
IAS 7 requires cash flows to be classified into operating, investing and financing activities. It also provides requirements concerning cash equivalents, reporting methods, foreign currency cash flows, taxes, non-cash transactions and disclosures relating to financing liabilities.
IFRS 18 Presentation and Disclosure in Financial Statements makes important consequential changes to IAS 7 for entities that apply it. The two that matter most are:
- Indirect method starting point: the reconciliation starts from operating profit or loss instead of profit or loss.
- Interest and dividends: the classification options that exist before IFRS 18 are removed for many entities and replaced by more standardized requirements, based on whether the entity has specified main business activities. Dividends paid are presented as financing for all entities.
Source / standard reference: IFRS 18 Presentation and Disclosure in Financial Statements (including its consequential amendments to IAS 7) and IAS 7 Statement of Cash Flows, IFRS Foundation.
Standards update: This article reflects IFRS Foundation information available as of September 21, 2026, the "last updated" date shown at the top. IFRS 18 is effective for annual reporting periods beginning on or after January 1, 2027, with earlier application permitted. When a particular entity must apply IFRS Accounting Standards changes also depends on adoption by its local regulator or standard setter. Check the latest IFRS Foundation guidance and local adoption requirements when preparing actual financial statements.
Separately, the IASB has a project on the statement of cash flows and related matters on its standard-setting work plan. Topics under consideration include the disaggregation of cash flow information, disclosure of non-cash transactions, the consistent application of the definition of cash equivalents and more consistent application of the operating, investing and financing classification requirements. On the last updated date shown above, the project was still in development, so it should not be confused with requirements that are already effective.
Frequently Asked Questions
What is a cash flow statement?
A cash flow statement is a financial statement that reports movements in cash and cash equivalents during an accounting period. It normally classifies cash flows into operating, investing and financing activities.
What are the three types of cash flow?
The three main categories are operating activities, investing activities and financing activities.
What is the difference between cash flow and profit?
Profit measures recognized income and expenses, while cash flow focuses on actual movements in cash and cash equivalents. A company can therefore report profit while experiencing weak cash flow.
What is the indirect method of cash flow?
The indirect method starts with profit or loss (operating profit or loss once IFRS 18 applies) and adjusts for non-cash items, changes in operating assets and liabilities, and items whose cash flows belong to investing or financing activities, to determine operating cash flow.
What is the direct method of cash flow?
The direct method presents major classes of gross cash receipts and gross cash payments from operating activities.
What is the formula for a cash flow statement?
Net change in cash equals operating cash flow plus investing cash flow plus financing cash flow. Closing cash and cash equivalents equal opening cash and cash equivalents plus the net change in cash, with outflows entered as negative numbers.
Why can a profitable company have negative cash flow?
A profitable company can have negative cash flow because revenue may have been generated on credit, inventory may have increased, suppliers may have been paid, capital expenditures may have been made, or other cash outflows may have exceeded cash inflows.
Is depreciation included in cash flow?
Depreciation is a non-cash accounting expense. Under the indirect method, it is generally adjusted when reconciling the relevant profit subtotal to operating cash flow.
Where are interest and dividends shown in the cash flow statement?
Under IAS 7 before IFRS 18 applies, interest paid and dividends paid can be classified as operating or financing, while interest received and dividends received can be classified as operating or investing, applied consistently from period to period. When IFRS 18 applies, dividends paid are financing for all entities. An entity without specified main business activities classifies interest paid as financing and interest and dividends received as investing. Entities with specified main business activities, meaning those that invest in particular types of assets or provide financing to customers as a main business activity, classify those items based on how the related income and expense is classified in the income statement.
Why is the cash flow statement important for small businesses?
It helps a small business understand whether enough cash is being generated to pay suppliers, employees, lenders and other obligations, even when the income statement shows a profit.
What is the difference between a cash flow statement and a cash flow forecast?
A cash flow statement reports the actual cash movements of a completed period, while a cash flow forecast estimates expected future cash inflows and outflows for planning. The statement is a financial reporting document, and the forecast is a management planning tool.
Final Takeaway
The cash flow statement explains something that profit and the balance sheet cannot show by themselves: how cash actually moved during the reporting period.
The three main sections—operating, investing and financing activities—help users identify where cash came from and where it went. The direct and indirect methods provide different ways of presenting operating cash flows, while the relationship between cash flow, profit, working capital and the balance sheet provides a clearer picture of financial performance and liquidity.
For students, the most important concept is simple: profit is not cash. For accountants, the key challenge is accurate classification and reconciliation. For business owners, the practical question is whether the business can consistently generate enough cash to fund operations and meet its obligations.
When cash flow reporting is combined with accurate bookkeeping, bank reconciliation, financial statements and properly configured accounting or ERP systems, it becomes a useful tool for financial analysis and business management.
Key takeaways
- Profit is not cash: credit sales, inventory and supplier timing can move them apart.
- IAS 7 splits cash flows into operating, investing and financing activities, and their total explains the change from opening to closing cash.
- The direct and indirect methods differ only in how operating cash flow is presented. Both give the same figure.
- Check how interest, dividends and tax are classified, and watch the IFRS 18 changes effective from January 1, 2027.
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