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ACCA Applied Knowledge · Financial Accounting

Statement of Cash Flows for ACCA Financial Accounting

A statement of cash flows shows how cash and cash equivalents moved in a period, split into operating, investing and financing activities. To solve it, start with profit before tax, adjust for non-cash items and working capital changes, then work out each cash flow from the statements of financial position and the notes.

What this chapter covers

This chapter teaches you to build a statement of cash flows under IAS 7. It reports the cash that came in and went out during the year. It does not report profit. A business can be profitable and still run out of cash, and this statement shows why.

You work from two statements of financial position and the statement of profit or loss, plus some notes. You split cash movements into three groups: operating, investing and financing. For operating activities you will almost always use the indirect method. It starts with profit before tax and adjusts it to cash generated from operations.

This chapter pulls together much of the rest of FA. You need depreciation and disposals from non-current assets. You need share issues and loans from equity and liabilities. You need inventory, receivables and payables from working capital. You need tax and finance costs from the accounts you prepare. If those chapters are weak, this one will expose it. In the exam, it appears in the 2-mark objective questions in Section A. It can also appear in the 15-mark accounts preparation question in Section B, which is part of the 100-mark, two-hour computer-based exam.

Cash flow questions are very mechanical, so they reward practice more than almost any other FA topic. Once you know the layout and the standard workings, you can pick up marks quickly in both short objective questions and longer multi-task questions. The chapter also tests whether you truly understand the other areas of the paper, so working through it strengthens your overall FA result. The pass mark is 50%, and a well-practised cash flow question is one of the more reliable ways to get there.

Statement of cash flows (excluding partnerships): topics in the order to study them

  1. 1Purpose and Format of the Statement of Cash FlowsYou need to know what counts as cash and cash equivalents, and the three headings, before any calculation makes sense.
  2. 2Cash Generated from Operations: Indirect MethodThis is the largest and most tested section, and it uses profit and working capital movements you already know.
  3. 3Cash Flows from Investing ActivitiesNext you handle non-current asset purchases and disposals, which build on your depreciation and disposal skills.
  4. 4Cash Flows from Financing ActivitiesShare issues, loans and dividends are simple movements once you can compare two statements of financial position.
  5. 5Interest and Tax Paid WorkingsThese need small ledger-style workings, so they come after the main sections are clear.
  6. 6Preparing a Full Statement of Cash FlowsNow you combine every section into one statement and check it against the change in cash.
  7. 7Interpreting the Statement of Cash FlowsLast, you learn to comment on what the numbers say, which only works once you can produce them.

How to prepare Statement of cash flows (excluding partnerships)

Learn the layout first, then drill the workings until they are automatic. Do not just read worked answers. Build the statement yourself each time.

  1. Memorise the format: operating, investing, financing, then net change in cash, opening cash and closing cash.
  2. Practise the indirect method: profit before tax, add back depreciation and finance costs, adjust for gains or losses on disposal, then working capital changes.
  3. Learn the direction rule: an increase in inventory or receivables reduces cash, and an increase in payables increases cash.
  4. Do the ledger workings for non-current assets, tax and interest. Use opening balance plus charge minus closing balance to find the cash paid.
  5. Work full questions under timed conditions, and always check that your closing cash agrees to the statement of financial position.
  6. Finish with objective practice: multiple choice, multiple response and number entry, so you can handle each answer type quickly.
  7. Practise writing two or three lines of interpretation, covering cash generation, spending and funding.

Common mistakes in Statement of cash flows (excluding partnerships)

    Last-day revision: Statement of cash flows (excluding partnerships)

    • Cash flows are grouped into operating, investing and financing activities.
    • Cash equivalents are short-term, highly liquid investments that are easily converted to a known amount of cash.
    • Indirect method starts with profit before tax, not profit after tax.
    • Add back depreciation as a non-cash charge. Add back finance costs to profit, then show the interest actually paid separately, in operating or financing activities as the format requires.
    • Deduct a profit on disposal and add back a loss on disposal.
    • Increase in inventory or receivables lowers cash; increase in payables raises cash.
    • The opening + charge − closing formula works for liability accounts only, such as tax payable and interest accrued. Tax paid = (opening current tax + opening deferred tax liability) + tax charge in the statement of profit or loss − (closing current tax + closing deferred tax liability). Leave out any deferred tax items if none are given.
    • Interest paid = opening accrual + finance cost − closing accrual. This is a liability account, so the same formula applies.
    • IAS 7 permits interest paid and dividends paid to be shown in either operating or financing activities. In FA answers, interest paid is commonly shown in operating activities (with tax paid) and dividends paid in financing. Follow the format given in the question.
    • Non-current asset purchases: use opening carrying amount + additions − depreciation − disposals = closing carrying amount.
    • Share issue cash includes both share capital and share premium increases, unless there is a bonus issue.
    • The net change in cash must equal the change between opening and closing cash and cash equivalents.

    Statement of cash flows (excluding partnerships) practice questions

    Statement of cash flows (excluding partnerships) in other exams

    The same ground in other exams, if you are preparing for more than one or want another angle on it.

    Statement of cash flows (excluding partnerships): frequently asked questions