Comprehensive question
This chapter compares the direct and indirect formats for the operating section, then works a complete statement of cash flows using the indirect method.
Learning objective
By the end of this chapter, you should be able to:
- Prepare a statement of cash flows or extracts as applicable
Format of the statement of cash flows
A complete statement of cash flows brings together cash flows from three categories:
- operating activities
- investing activities
- financing activities
The separate statements for these three categories (covered in the previous two chapters) are consolidated into a single comprehensive statement of cash flows, as shown in the worked illustration below.
Note: The direct and indirect methods differ only in how the operating section is presented - both methods must arrive at the same net cash from operating activities, and the investing and financing sections are prepared identically either way (see the full worked illustration below). You’ll want to be very familiar with the standard format of the statement of cash flows, because marks in examinations often depend on correct headings, subtotals, and presentation.
Direct method
The direct method lists the major categories of cash receipts and payments that make up operating activities. The investing and financing sections are prepared the same way regardless of method - the BAMBO illustration below shows them combined with an indirect-method operating section.
CASH FLOWS FROM OPERATING ACTIVITIES (DIRECT METHOD) FOR THE YEAR ENDED 31 DECEMBER 2024
| $ | $ | |
|---|---|---|
| Cash received from customers | 360,000 | |
| Cash paid to suppliers | (120,000) | |
| Cash paid for rent | (17,200) | |
| Cash paid to employees | (49,800) | |
| Cash generated from operations | 173,000 | |
| Income tax paid | (38,000) | |
| Net cash from operating activities | 135,000 |
Indirect method
The indirect method starts from operating profit and adjusts for non-cash items and changes in working capital to arrive at the same net cash from operating activities.
CASH FLOWS FROM OPERATING ACTIVITIES (INDIRECT METHOD) FOR THE YEAR ENDED 31 DECEMBER 2024
| $ | $ | |
|---|---|---|
| Operating profit | 187,000 | |
| Adjustments for: | ||
| Depreciation charge | 45,000 | |
| Loss on disposal of assets | 8,000 | |
| Operating profit before changes in working capital | 240,000 | |
| Changes in working capital: | ||
| Increase in inventory | (22,000) | |
| Increase in trade receivables | (31,000) | |
| Decrease in trade payables | (14,000) | |
| Cash generated from operations | 173,000 | |
| Income taxes paid | (38,000) | |
| Net cash from operating activities | 135,000 |
Both methods produce the same net cash from operating activities; only the presentation of the operating section differs.
Illustration: BAMBO Company Ltd
You are the financial accountant for BAMBO Company Ltd. The company’s draft statements of financial position as at 31 December 2025 and 2024, and the statement of profit or loss for the year ended 31 December 2025 are provided below.
Statement of financial position as at 31 December
| 2025 | 2024 | |
|---|---|---|
| $'000 | $'000 | |
| Non-current assets: | ||
| Property, plant and equipment (Note 1) | 535 | 380 |
| Current assets: | ||
| Inventory | 125 | 98 |
| Trade receivables | 142 | 156 |
| Cash and cash equivalents | 18 | 5 |
| Total current assets | 285 | 259 |
| Total assets | 820 | 639 |
| EQUITY AND LIABILITIES | ||
| Equity: | ||
| Share capital ($1 ordinary shares) | 200 | 150 |
| Share premium | 50 | 30 |
| Retained earnings | 295 | 248 |
| Revaluation surplus | 50 | 0 |
| Total equity | 595 | 428 |
| Non-current liabilities: | ||
| 6% bank loan | 80 | 120 |
| Current liabilities | ||
| Trade payables | 115 | 71 |
| Tax payable | 30 | 20 |
| 145 | 91 | |
| Total equity and liabilities | 820 | 639 |
Statement of profit or loss for the year ended 31 December 2025
| $'000 | |
|---|---|
| Revenue | 1,240 |
| Cost of sales | (785) |
| Gross profit | 455 |
| Distribution costs | (128) |
| Administrative expenses | (165) |
| Operating profit | 162 |
| Profit before financing and income taxes | 162 |
| Finance costs | (7) |
| Profit before income taxes | 155 |
| Income tax expense | (38) |
| Profit for the year | 117 |
| Other comprehensive income: | |
| Gain on revaluation of property, plant and equipment | 50 |
| Total comprehensive income | 167 |
Note 1: Property, plant and equipment
| $'000 | |
|---|---|
| Carrying amount at 1 January 2025 | 380 |
| Additions at cost | 175 |
| Disposals - carrying amount | (15) |
| Depreciation charge for the year | (55) |
| Revaluation surplus | 50 |
| Carrying amount at 31 December 2025 | 535 |
Additional information:
- A piece of equipment with an original cost of $25,000 and accumulated depreciation of $10,000 was sold during the year for $12,000.
- Dividends of $70,000 were paid during the year.
- There were no movements in non-current liabilities other than the repayment of the bank loan.
Required: Prepare a statement of cash flows for BAMBO Company Ltd for the year ended 31 December 2025 using the indirect method, in accordance with IAS 7 statement of cash flows. Your statement should show cash flows under the following headings:
- Cash flows from operating activities
- Cash flows from investing activities
- Cash flows from financing activities
Suggested solution:
Try to prepare the statement on your own before checking the solution.
| Cash flows from operating activities | Notes | $'000 | $'000 |
|---|---|---|---|
| Operating profit | 162 | ||
| Adjustments for: | |||
| Depreciation charge | 55 | ||
| Loss on disposal of equipment | 1 | 3 | |
| Operating profit before working capital changes | 220 | ||
| Changes in working capital: | |||
| Increase in inventory | (27) | ||
| Decrease in trade receivables | 14 | ||
| Increase in trade payables | 44 | ||
| Cash generated from operations | 251 | ||
| Income tax paid | 2 | (28) | |
| Net cash from operating activities | 223 | ||
| Cash flows from investing activities | |||
| Purchase of property, plant and equipment | (175) | ||
| Proceeds from sale of equipment | 12 | ||
| Net cash used in investing activities | (163) | ||
| Cash flows from financing activities | |||
| Proceeds from issue of ordinary shares (share premium inclusive) | 70 | ||
| Repayment of bank loan | (40) | ||
| Interest paid | (7) | ||
| Dividends paid | (70) | ||
| Net cash used in financing activities | (47) | ||
| Net increase in cash and cash equivalents | 13 | ||
| Cash and cash equivalents at beginning of year | 5 | ||
| Cash and cash equivalents at end of year | 18 |
Note: Always ensure your cash movement reconciles with the net change in the cash and cash equivalent balance. If it doesn’t, go back through your workings and check each section (operating, investing, and financing) systematically.
Working notes:
- Loss on disposal of equipment: carrying amount at disposal = $25,000 cost − $10,000 accumulated depreciation = $15,000. Proceeds were $12,000, so the loss on disposal = $15,000 − $12,000 = $3,000.
- Income tax paid: opening tax payable $20,000 + tax expense for the year $38,000 − closing tax payable $30,000 = $28,000 paid in cash.
- Proceeds from share issue: increase in share capital ($200,000 − $150,000 = $50,000) plus increase in share premium ($50,000 − $30,000 = $20,000) = $70,000 received in cash.
- Revaluation surplus: the $50,000 revaluation surplus is a non-cash gain recognised directly in other comprehensive income, so it doesn’t appear anywhere in the statement of cash flows.
- Increases in inventory or trade receivables tie up cash, so they’re deducted when reconciling profit to cash; decreases free up cash, so they’re added back. That’s why the $27,000 increase in inventory is deducted while the $14,000 decrease in trade receivables is added back. Trade payables work the other way: an increase means cash hasn’t yet been paid out, so it’s added back (the $44,000 increase here), and a decrease is deducted.
- Direct method: to present the operating section by the direct method instead, work out each receipt and payment as in Operating cashflows. For example, cash received from customers = opening trade receivables $156,000 + revenue $1,240,000 - closing trade receivables $142,000 = $1,254,000. Cash paid to suppliers is worked the same way, from purchases and the movement in trade payables.
The T-accounts below show working notes 1 and 2 in ledger form.
Note: This comprehensive question covers many of the core IAS 7 techniques, but it doesn’t include every situation you may see in practice or in an exam. The remaining principles are covered in the preceding two chapters. Use this question for practice with the main adjustments and layout, and then work through the other illustrations to make sure you can handle a wider range of scenarios. The next chapter, Benefits and drawbacks, looks at how users interpret this statement - including the difference between profit and cash flow.