The Statement of Cash Flows
Direct and indirect method, start to finish.
The statement of cash flows explains the one number the other statements cannot: why the cash balance changed. Profit and cash are not the same thing, and this chapter is about the difference. It opens with classification — what counts as cash and cash equivalents, and how IAS 7 sorts every cash flow into operating, investing or financing, including the choices it allows for interest and dividends. The direct method comes first because it is the most intuitive: build each operating cash flow from its income-statement figure and the change in the related working-capital balance, then assemble full statements. The indirect method follows in stages: the reconciliation from profit to operating cash flow and why each adjustment goes the way it does, building the statement, the gains and losses on disposals that must be taken out of operating activities, and complete statements. It closes with integrated capstones where the cash flow statement has to be built from the other statements, and an optional section of indirect-method statements in US GAAP presentation.
Log in to track your progress through the chapter.
01What Counts as a Cash Flow
IAS 7 splits every cash flow into operating, investing or financing — and some movements, like buying a cash equivalent, are not cash flows at all. Get the classification right first; the arithmetic afterwards is easy.
02Direct Method
Building Operating Activities: the direct method reports where cash actually came from and went — received from customers, paid to suppliers, paid to employees.
03Direct Method
Full Statements: the same operating section, now assembled end to end from real account balances into one complete direct-method statement.
04Indirect Method
Reconciliation Mechanics: start from profit and work backwards. Every adjustment either undoes a non-cash item or corrects for a working-capital movement.
05Indirect Method
Building the Statement: profit, back out the non-cash items, adjust for working capital, then add investing and financing.
06Indirect Method
Disposal Gains & Losses: a gain or loss on disposal sits in profit but belongs entirely in investing. It has to be removed from operating and the whole proceeds shown below.
07Indirect Method
Complete Statements: the complete statement with no scaffolding — build it start to finish the way it will actually be tested.
08Integrated Capstones
cash flow does not stand alone. It is one of three statements that must all reconcile to the same underlying facts.
09Indirect Method under US GAAPOptional · US GAAP
for US GAAP students — indirect-method statements in US GAAP presentation, where interest and dividends paid have fixed classifications. IFRS students can skip this section.