Financial Accounting · Statement of cash flows (excluding partnerships)

How to Prepare a Full Statement of Cash Flows

Updated 11 October 2026 · Fact-checked

A statement of cash flows under IAS 7 shows how cash moved in three sections: operating, investing and financing. To prepare it, start with profit before tax, adjust for non-cash items and working capital, then add workings for interest, tax, non-current assets, shares, loans and dividends. Finish by reconciling to the opening and closing cash and cash equivalents.

Understand Preparing a Full Statement of Cash Flows

A statement of cash flows explains why cash changed during the year. Profit is not cash. Depreciation reduces profit but costs no cash. Credit sales raise profit before the customer pays. So you must convert accounting figures back into real cash movements.

IAS 7 splits cash flows into three groups. Operating activities are the day-to-day trading cash flows. Investing activities are buying and selling non-current assets. Financing activities are cash from or to owners and lenders, such as share issues, loan changes and dividends paid.

You build the statement from two statements of financial position (opening and closing) plus the statement of profit or loss. Every cash flow is the difference between a balance that moved and a profit or loss figure. Think of each line as a small ledger account: opening balance, plus or minus the P&L figure, equals closing balance, and the missing figure is cash.

Cash and cash equivalents means cash in hand, bank balances and very short-term, readily convertible investments. Bank overdrafts repayable on demand are normally included as a negative. The statement must end with a net increase or decrease that agrees to the change in this figure.

In the exam you meet this in two ways: Section A questions asking for one figure (for example tax paid), and a 15-mark Section B question that may ask you to complete a full statement. The method is the same for both.

Key formulas to remember

Cash generated from operations (indirect method): Profit before tax + depreciation + loss on disposal (or − profit) + finance costs − investment income ± changes in inventory, receivables and payables; Increase in inventory or receivables is deducted. Increase in payables is added. Reverse for decreases.
Tax paid: Opening tax payable + income tax charge in P&L − closing tax payable; Include deferred tax only if the question gives it; adjust the charge for any deferred tax movement.
Interest paid: Opening accrued interest + finance cost in P&L − closing accrued interest; If no accrual is given, interest paid equals the finance cost.
Purchase of non-current assets: Closing carrying amount − opening carrying amount + depreciation + carrying amount of disposals − revaluation surplus; Use only the cash element if some assets were acquired without cash payment.
Disposal proceeds: Carrying amount of asset sold + profit on disposal (or − loss on disposal); The loss or profit is also adjusted in the operating section, so it is not counted twice.
Dividends paid: Opening retained earnings + profit for the year − closing retained earnings; Works when retained earnings only move for profit and dividends. A dividend payable balance would change this.
Cash from share issue: Increase in share capital + increase in share premium; A bonus issue is not a cash flow. Remove it first.
Net change in cash: Net operating + net investing + net financing = closing − opening cash and cash equivalents; This is your final check. If it does not agree, find the error.

How to solve Preparing a Full Statement of Cash Flows questions

Use the same order every time. It stops you missing items and makes your workings easy to follow and to mark.

1Read the requirement. Note whether you need the full statement or one figure, and whether the format is indirect method for operating activities.
2Set up the layout: operating, investing, financing, net change, opening cash, closing cash. Leave space for each line.
3Start with profit before tax. Add back depreciation, losses on disposal and finance costs. Deduct profits on disposal and investment income. Then adjust for changes in inventory, receivables and payables.
4Prepare workings for interest paid and tax paid, then deduct them to reach net cash from operating activities.
5Work out investing flows: non-current asset additions (using the carrying amount reconciliation) and disposal proceeds. Show purchases as negatives and proceeds as positives.
6Work out financing flows: shares issued (capital plus premium), loans raised or repaid, and dividends paid. Remember to exclude bonus issues and revaluations.
7Total the three sections, then add the net change to opening cash and cash equivalents. Check it equals the closing figure in the statement of financial position.
8If the totals differ, check signs on working capital, the tax and dividend workings, and whether any figure was counted in two sections.

Quickest way: Movement-by-movement check

When to use it: Use this when time is short, especially in Section A where you need only one or two figures, or in Section B when you want a fast tick-through of the statements of financial position.

Go down the statement of financial position line by line and mark each balance that moved.
For each movement, decide where it belongs: working capital, investing, financing, tax, or non-cash (such as revaluation or bonus issue).
Write the cash effect next to each line. An asset increase is a cash outflow. A liability or equity increase is a cash inflow.
Do separate quick ledger workings only for PPE, tax, interest and retained earnings.
Add up and compare with the movement in cash. If it agrees, you have used every movement once.

Common mistakes in Preparing a Full Statement of Cash Flows

Adding an increase in receivables or inventory instead of deducting it
Students link 'increase' with 'add' and forget that more receivables means cash not yet collected.
Fix: Remember: more assets tied up means less cash. Deduct increases in inventory and receivables, add increases in payables.
Using the tax charge or finance cost from the P&L as the cash paid
The P&L figure is easy to find and the opening and closing balances are overlooked.
Fix: Always do the small ledger working: opening balance + charge − closing balance = paid.
Using the change in PPE carrying amount as the purchase figure
Students forget that depreciation and disposals also reduced the balance.
Fix: Reconcile: opening + additions + revaluation − depreciation − disposals = closing, and solve for additions.
Counting disposal loss or profit twice
It is adjusted in operating activities and then the full proceeds are also shown in investing.
Fix: Adjust the loss or profit in operating activities, and show only the cash proceeds in investing.
Treating a bonus issue or revaluation as cash
Share capital or asset balances rise, so it looks like a cash inflow or outflow.
Fix: Ask 'did cash actually move?' Bonus issues and revaluation surpluses are non-cash and are excluded.
Showing dividends paid as the dividend in the statement of changes in equity without checking
A proposed final dividend or a dividend payable balance may exist and not be paid in the year.
Fix: Use the retained earnings working, and adjust for any dividend payable shown in the statements of financial position.

Worked examples

Example 1

Extracts for Delta Co for the year ended 31 December 20X2 ($000). Profit before tax 260, after charging depreciation 70, finance cost 20 and a loss on disposal of PPE 10. Income tax charge 60. Dividends paid 50. PPE was sold for $25,000. Statement of financial position 20X2 / 20X1: PPE 540 / 390 (carrying amounts)... wait, use the following: PPE 540 / 390; inventory 130 / 110; receivables 95 / 100; cash 45 / 30; share capital 200 / 150; share premium 60 / 40; retained earnings 300 / 150; loan notes 150 / 200; trade payables 75 / 60; tax payable 25 / 30. Prepare the statement of cash flows using the indirect method.

Show the solution

Cash generated from operations: profit before tax 260 + depreciation 70 + loss on disposal 10 + finance cost 20 = 360.
Working capital: inventory increased by 20 (deduct 20); receivables fell by 5 (add 5); payables rose by 15 (add 15). Cash generated from operations = 360 − 20 + 5 + 15 = 360.
Interest paid: no accrual is given, so interest paid = finance cost = 20.
Tax paid: opening 30 + charge 60 − closing 25 = 65.
Net cash from operating activities = 360 − 20 − 65 = 275.
PPE additions: closing 540 − opening 390 + depreciation 70 + disposal carrying amount 35 = 255. The disposal carrying amount is proceeds 25 + loss 10 = 35.
Net cash used in investing = −255 + 25 = −230.
Shares issued: capital up 50 plus premium up 20 = 70. Loan notes repaid 200 − 150 = 50. Dividends paid 50. Net financing = 70 − 50 − 50 = −30.
Dividend check: opening retained earnings 150 + profit after tax 200 − closing 300 = 50, which agrees.
Net increase in cash = 275 − 230 − 30 = 15. Opening cash 30 + 15 = 45, which agrees to the closing balance.

Answer: Net cash from operating activities $275,000; net cash used in investing activities $230,000; net cash used in financing activities $30,000; net increase in cash $15,000; cash at start $30,000 and at end $45,000.

Example 2

Section A number entry style. For Sigma Co, PPE had a carrying amount of $500,000 at the start of the year and $620,000 at the end. During the year there was a revaluation surplus of $40,000, depreciation of $60,000, and disposals with a carrying amount of $30,000. Retained earnings were $180,000 at the start and $210,000 at the end, and profit for the year was $90,000. What was (a) the cash paid for PPE additions and (b) the dividends paid? Assume all additions were paid for in cash and no dividend balance was payable.

Show the solution

(a) Set up the PPE reconciliation: opening 500 + additions + revaluation 40 − depreciation 60 − disposals 30 = closing 620.
Rearrange: additions = 620 − 500 − 40 + 60 + 30 = 170.
Check: 500 + 40 + 170 − 60 − 30 = 620. Correct.
(b) Retained earnings: opening 180 + profit 90 − dividends = closing 210.
Dividends = 180 + 90 − 210 = 60.

Answer: (a) $170,000 paid for PPE additions (shown as an investing outflow); (b) $60,000 dividends paid (shown as a financing outflow).

Exam tips

Show every working clearly in Section B, even if the question seems straightforward. Marks are often available for the method on each line, and the answer to a single-figure question depends on the same working.
In Section A, read what the question wants: a cash flow figure, a total, or a sign. Number entry questions often need a negative sign or brackets for outflows, so follow the instruction given.
Check the final reconciliation to opening and closing cash and cash equivalents. If it does not agree, you know something is wrong before you submit.
Scan the question for traps: revaluation, bonus issue, a disposal with a loss or profit, an accrued interest balance, or a dividend payable. Each changes one working.
On multiple response questions, work out each option yourself instead of guessing from the wording. Use a quick note on the scratch paper for each movement.

Practice questions from Statement of cash flows (excluding partnerships)

Preparing a Full Statement of Cash Flows in other exams

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

Preparing a Full Statement of Cash Flows: frequently asked questions

Do I need to know both the direct and indirect methods for FA?

The indirect method is the one you need to practise most, because it starts from profit before tax and is the common exam format. You should understand that the direct method reports actual cash receipts and payments. Both give the same net cash from operating activities.

Where do interest and tax paid go in the statement?

In the approach used for most FA questions, interest paid and tax paid are deducted in the operating section, after cash generated from operations. Calculate each with a small ledger working. IAS 7 allows some flexibility for interest, but follow the layout the question gives.

Why is a bonus issue left out of the statement of cash flows?

A bonus issue converts reserves into share capital. No cash is received or paid, so it has no place in the statement. Remove it before you work out cash raised from shares.

How do I know if a bank overdraft is included in cash and cash equivalents?

Under IAS 7, an overdraft that is repayable on demand and forms part of day-to-day cash management is included as a negative balance. Check the question wording. If the overdraft is treated as a loan, it belongs in financing instead.