Statement of Cash Flows

The statement of cash flows, also called the cash flow statement, is the financial statement that shows how much cash and cash equivalents an organisation received and paid during a period, and why its cash balance changed. It sorts every cash movement into three groups: operating activities, investing activities and financing activities. Lenders, investors and managers use it to see whether a business generates cash or consumes it.

It is one of the primary financial statements. It complements the income statement, which is prepared on an accruals basis and can show a profit even when little cash has arrived, and it explains the movement in the cash line on the balance sheet. Under IFRS it is governed by IAS 7; under US GAAP by ASC Topic 230.

Imagine checking a bank statement at the end of the month and sorting every line into three piles. The first pile is everyday life: salary in, groceries and bills out. The second pile is big purchases or sales of things you keep, such as a car. The third pile is borrowing and repaying, such as a new loan or a credit card payoff.

A company's cash flow statement is that same sorting exercise. The everyday pile shows whether the core business pays its own way. The big-purchase pile shows how much it is investing in its future. The borrowing pile shows how much money came from, or went back to, lenders and owners.

• Operating activities. Cash from customers, cash paid to suppliers and staff, and taxes paid. This is the cash generated by the main business.
• Investing activities. Purchases and sales of long-term assets such as equipment, property and other companies, and investments in securities.
• Financing activities. Cash raised from or repaid to lenders and owners: issuing shares, taking out or repaying a loan, issuing bonds and paying dividends.

The three totals add up to the change in cash:

where $\Delta \text{Cash}$ is closing cash minus opening cash, CFO is net cash from operating activities, CFI is net cash from investing activities and CFF is net cash from financing activities.

Operating cash flow can be presented in two ways. The direct method lists gross receipts and payments (cash from customers, cash to suppliers). The indirect method starts from profit and adjusts it for non-cash items and changes in working capital. Both IAS 7 and ASC 230 encourage the direct method, but most companies use the indirect one.

A worked example, indirect method (figures in thousands): a company reports net income of 150 and depreciation of 50. Its accounts receivable rose by 40 (customers owe more, so less cash came in), and its accounts payable rose by 20 (it paid suppliers more slowly).

The business made a profit and produced 180 of operating cash, yet its cash fell by 10 because it invested and repaid debt. Operating cash minus capital spending (180 − 120 = 60) is often called free cash flow, a non-GAAP measure.

The two frameworks classify some items differently. Under US GAAP, interest paid and interest and dividends received are operating cash flows, and dividends paid are financing. IAS 7 has allowed a choice: interest paid could be operating or financing, and interest and dividends received could be operating or investing.

That choice is being removed. The amendments to IAS 7 made with IFRS 18, effective for annual periods beginning on or after 1 January 2027, require most non-financial companies to classify interest paid as financing and interest and dividends received as investing, and to start the indirect method from the new operating profit subtotal rather than from profit before tax. Banks and other entities whose main business is lending or investing follow separate rules.

The statement is central to corporate treasury work and to cash forecasting, and it is often the first statement credit analysts read. Common uses and signals include:

• Quality of earnings. Operating cash persistently below profit can mean aggressive revenue recognition or growing unpaid receivables.
• Liquidity. A business with negative operating cash flow must fund itself by borrowing or raising equity, which raises liquidity risk.
• Working-capital management. Changes in receivables, payables and stock link directly to the cash conversion cycle.
• Debt capacity. Lenders compare operating cash with EBITDA and debt service obligations.

The statement has limits too. Companies have some room to time payments around the period end, for example by delaying supplier payments, and supplier-finance arrangements can move cash between categories. IAS 7 (from 2024) and US GAAP (from 2023) now require extra disclosure of supplier finance arrangements for this reason.

• IFRS Foundation: IAS 7 Statement of Cash Flows