Statements and analysis

IAS 7 · Statement of cash flows

Profit is not cash; this statement shows where the cash went.

Draft: not yet reviewed by a teacher

Why it exists

A profitable company can still fail if its cash is tied up in inventory and receivables. The statement of profit or loss is built on accruals, so users need a separate statement of actual cash: is there enough for wages, debts and growth?

Key rules

Operating activities: the main business — cash from customers, payments to suppliers and staff, income tax paid.
Investing activities: buying and selling non-current assets and investments, interest and dividends received.
Financing activities: issuing shares, raising and repaying loans, interest and dividends paid.
Indirect method (IFRS 18): operating profit + non-cash expenses (depreciation, loss on disposal) − profit on disposal − increases in inventory and receivables + increase in payables.
The direct method shows the flows themselves: cash from customers, to suppliers, to staff. The operating total is the same.
Interest and dividends: under IAS 7 as amended by IFRS 18 (from 2027) a typical trading company shows interest and dividends paid under financing and interest and dividends received under investing; earlier there was a choice. Follow the layout the question gives.

Examples

Operating profit 48,000; depreciation 12,000; loss on disposal 1,500; inventory up 6,000, receivables up 4,500, payables up 3,000.

Cash generated from operations: 48,000 + 12,000 + 1,500 − 6,000 − 4,500 + 3,000 = 54,000
Tax: opening liability 7,000 + charge 9,000 − closing liability 8,000 = 8,000 paid
Net cash from operating activities: 54,000 − 8,000 = 46,000

The indirect method

PPE: opening carrying amount 150,000, closing 180,000; depreciation 12,000; an asset with a carrying amount of 5,000 sold for 3,500.

Purchases: 180,000 − 150,000 + 12,000 + 5,000 = 47,000 (an investing outflow)
Disposal proceeds 3,500 (an investing inflow)
The loss of 5,000 − 3,500 = 1,500 is added back under operating activities

PPE purchases from the account

How it works

The indirect method starts from operating profit and removes everything that was not cash. Depreciation reduced profit but no cash left, so it is added back. An increase in receivables means some revenue is still unpaid, so it is deducted. An increase in payables means some expenses are still unpaid, so it is added.

Missing figures (PPE purchases, tax paid) come from the account: opening balance + movements − closing balance.

Traps

Taught in the course

Key rules

Operating activities: the main business — cash from customers, payments to suppliers and staff, income tax paid.

Investing activities: buying and selling non-current assets and investments, interest and dividends received.

Financing activities: issuing shares, raising and repaying loans, interest and dividends paid.

Indirect method (IFRS 18): operating profit + non-cash expenses (depreciation, loss on disposal) − profit on disposal − increases in inventory and receivables + increase in payables.

The direct method shows the flows themselves: cash from customers, to suppliers, to staff. The operating total is the same.

Interest and dividends: under IAS 7 as amended by IFRS 18 (from 2027) a typical trading company shows interest and dividends paid under financing and interest and dividends received under investing; earlier there was a choice. Follow the layout the question gives.