A cash flow statement shows how a company's cash and cash equivalents changed over a period, split into operating, investing and financing activities. IAS 7 requires it as an integral part of IFRS financial statements for every period presented. It explains why profit and cash differ.
What is a cash flow statement?
The statement of cash flows starts from cash at the beginning of the period and explains each movement to cash at the end. IAS 7 defines cash as cash on hand and demand deposits, and cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value (paragraph 6).
Every cash flow falls into one of three activities (paragraph 10). Operating activities are the main revenue-producing activities of the business. Investing activities are buying and selling long-term assets and other investments. Financing activities change the size and make-up of the company's equity and borrowings.
How is a cash flow statement prepared?
Operating cash flow can be shown by the direct method, listing major classes of gross receipts and payments, or by the indirect method, which adjusts profit for non-cash items and working capital (paragraph 18). The indirect method runs like this:
- Start from profitThe indirect method starts from profit or loss. For annual periods beginning on or after 1 January 2027, the IFRS 18 amendments make operating profit or loss the starting point.
- Add back non-cash itemsDepreciation, amortisation, impairments and new provisions reduce profit without using cash.
- Adjust for working capitalAn increase in receivables or inventory uses cash; an increase in payables provides it. See working capital.
- List investing cash flowsPurchases and sales of property, equipment, intangible assets and investments.
- List financing cash flowsLoans and murabaha drawn and repaid, lease payments and dividends paid. Under the IFRS 18 amendments, a company whose main business is not investing or lending also classifies interest paid here (paragraphs 33A and 34A).
- Reconcile to cashThe three totals, plus the effect of exchange rate changes on cash held in foreign currency, shown separately (paragraph 28), must equal the change in cash and cash equivalents.
What does a simple cash flow statement look like?
Why does the cash flow statement matter for GCC finance teams?
Profit can rise while cash falls, when growth ties cash up in receivables and stock or when the company is investing heavily. The cash flow statement shows which. Lenders read operating cash flow beside EBITDA to judge how much profit turns into cash.
In Saudi Arabia, SOCPA requires listed companies to apply IFRS as endorsed in the Kingdom for periods from 1 January 2017, with other entities following for periods from 1 January 2018; entities without public accountability apply the IFRS for SMEs Standard. SOCPA adopted IFRS 18, the standard that brings the IAS 7 changes above, for use in the Kingdom in December 2024, allowing early adoption.
The statement looks back. For the weeks ahead, finance teams use a 13-week cash flow forecast.
Questions people ask
What is the difference between the direct and indirect method?
The direct method lists the cash actually received from customers and paid to suppliers and staff. The indirect method starts from profit and adjusts for non-cash items and working capital. Both give the same operating cash flow, and IAS 7 allows either.
Where does interest paid go in the cash flow statement?
Under IAS 7 as amended by IFRS 18, a company whose main business is not investing or providing finance classifies interest paid as financing, and interest and dividends received as investing. These rules apply with IFRS 18; earlier periods may classify interest differently, so check the policy note.
Is EBITDA the same as operating cash flow?
No. EBITDA ignores changes in working capital, tax and zakat paid, and cash spent against provisions, so a company growing fast or collecting slowly can show strong EBITDA and weak operating cash flow.
Official and primary sources, read on the date shown. Rules change: confirm with the authority or your adviser before you act.
- IFRS Foundation: IAS 7 Statement of Cash Flows (standard page and summary) (read 9 October 2026)
- IFRS Foundation: IAS 7 Statement of Cash Flows (issued standard, HTML, incorporating the IFRS 18 amendments), paragraphs 1, 6, 10, 18, 28, 33A, 34A and 64 (read 9 October 2026)
- IFRS Foundation: IFRS 18 Presentation and Disclosure in Financial Statements (issued standard, HTML), paragraph C1 (effective date) (read 9 October 2026)
- SOCPA: Overview of professional standards (application of IFRS in Saudi Arabia) (read 9 October 2026)
- SOCPA news: SOCPA adopts IFRS 18 for implementation in Saudi Arabia (26 December 2024) (read 9 October 2026)