How to Prepare the Statement of Cash Flows Under IFRS and US GAAP: Step-by-Step Guide With Examples

The statement of cash flows details how cash and cash equivalents move through an organization during a reporting period. This statement enables stakeholders to evaluate an entity’s liquidity, financial flexibility, and operational efficiency by clearly distinguishing cash flows generated by operations, investment decisions, and financing activities.

Both IFRS (IAS 7) and US GAAP (ASC 230) treat the statement as a primary financial statement, but they feature technical differences in allowable formats, cash flow classifications, and required disclosures.

Cash flows are divided into operating, investing, and financing activities.

The statement of cash flows classifies all movements of cash and cash equivalents into three major categories, each reflecting a different aspect of a company’s financial management.

Operating activities are at the heart of the entity’s main business and day-to-day operations. They include all cash receipts and payments related to the core revenue-generating process, such as collections from customers, payments to suppliers and employees, and outflows for taxes and interest. These activities reveal whether the business can generate sufficient cash to sustain itself, invest in new opportunities, and return capital to shareholders.

Investing activities relate to the acquisition and disposal of long-term assets and other investments that are not considered cash equivalents. These activities typically include cash outflows to purchase property, plant, and equipment (PPE), acquire intangible assets, or invest in subsidiaries and financial instruments. Cash inflows arise from the sale of these assets or the receipt of principal from loans made to others. This section demonstrates the organization’s growth initiatives and capital expenditures, as well as any strategic divestitures.

Financing activities cover transactions that affect the equity and borrowings of the entity. Typical cash inflows include proceeds from issuing shares or raising debt, while outflows cover the repayment of loans, payment of dividends, and repurchase of shares. This classification highlights how the business funds its operations and expansion, and how it returns value to capital providers.

The separation of cash flows into these three categories makes it easier for users to analyze a company’s cash generation, its investment strategies, and its approach to financing and capital management.

Entities can use the direct or indirect method for reporting operating cash flows.

Both IFRS and US GAAP allow preparers to choose between the direct and indirect method when reporting cash flows from operating activities, but the two approaches differ in both presentation and the clarity they provide.

Direct method presents a detailed breakdown of gross cash receipts and payments. Examples include cash received from customers, cash paid to suppliers and employees, and cash paid for operating expenses. The direct method gives a transparent view of cash transactions but is less commonly used because it can require significant data collection and tracking of cash receipts and payments throughout the year.

Indirect method starts with net income (or profit or loss), then adjusts for all non-cash transactions and changes in working capital. Non-cash items—such as depreciation, amortization, and impairment losses—are added back, while gains and losses on asset sales are subtracted. Adjustments are also made for increases or decreases in accounts receivable, inventory, payables, and other working capital items. The indirect method is much more common because it leverages information already available from accrual-based financial statements, and because most accounting software is optimized for this approach.

IFRS and US GAAP requirements:

• If the direct method is used, both standards require a reconciliation to the indirect method as a supplemental disclosure.

• The choice of method should be applied consistently across periods, and any change must be disclosed and explained.

Providing both methods, or at least a reconciliation, gives users a fuller picture of how profit translates into cash and where differences arise due to accrual accounting.

Step-by-step process to prepare the statement of cash flows.

Step 1: Reconcile opening and closing cash balances.Begin by identifying the amounts of cash and cash equivalents at the beginning and end of the period. Cash equivalents include short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to insignificant risk of changes in value—typically with maturities of three months or less.

Step 2: Calculate cash flows from operating activities.

• Indirect method:

  • Start with net income (or loss) as reported on the income statement.

  • Add back all non-cash expenses, including depreciation, amortization, impairment losses, and provisions.

  • Subtract non-cash gains, such as those on the sale of fixed assets.

  • Adjust for changes in working capital accounts: increases in receivables or inventory represent outflows (cash not yet received or spent on stock), while increases in payables represent inflows (expenses incurred but not yet paid).

• Direct method:

  • Report cash receipts from customers, cash paid to suppliers, cash paid to and on behalf of employees, cash paid for other operating expenses, and cash paid for income taxes.

Step 3: Calculate cash flows from investing activities.

• Record all cash outflows related to the purchase of non-current assets (PPE, intangibles, investment properties).

• Capture all inflows from the disposal of these assets or from the sale or maturity of financial investments.

• Include loans advanced to third parties as outflows, and repayments received as inflows.

• Exclude any non-cash investing transactions (such as asset acquisitions through leases); these should be disclosed in the notes.

Step 4: Calculate cash flows from financing activities.

• Record cash inflows from the issuance of shares or debt instruments.

• Include cash outflows for the repayment of borrowings, lease liabilities, and payment of dividends.

• Account for share buybacks, equity settlements of employee stock plans, and other transactions with owners.

• All significant non-cash financing activities must be separately disclosed in the notes, not included in the cash flow statement itself.

Step 5: Present the net increase or decrease in cash and cash equivalents.

• Aggregate the net cash provided or used by each activity to arrive at the total net increase or decrease for the period.

• Reconcile this amount to the change in the cash and cash equivalents on the statement of financial position.

• Disclose any material non-cash movements or currency translation effects that impact the reported cash balances.

A step-by-step approach ensures that the statement is accurate, comprehensive, and supports reconciliation with other components of the financial statements.

IFRS and US GAAP differ in specific classifications and disclosures.

Although the structure of the statement of cash flows is similar under both IFRS and US GAAP, several detailed classification and disclosure differences exist, affecting comparability and financial analysis.

Interest and dividends:

• IFRS allows preparers to choose whether to classify interest paid, interest received, dividends received, and dividends paid as operating, investing, or financing cash flows, provided the policy is applied consistently. This flexibility enables entities to reflect their business model more accurately.

• US GAAP prescribes stricter rules: interest paid and received, and dividends received, are classified as operating activities; dividends paid are classified as financing activities. There are some exceptions for financial institutions and in rare circumstances.

Non-cash transactions:

• Both IFRS and US GAAP require significant non-cash investing and financing activities—such as acquiring assets through leases or equity swaps—to be excluded from the face of the cash flow statement but disclosed in the notes. This ensures the statement reflects only actual cash movements.

Foreign currency cash flows:

• Cash flows arising from transactions in a foreign currency must be translated at the exchange rate at the date of the cash flow.

• The effect of changes in exchange rates on cash and cash equivalents must be disclosed separately from operating, investing, and financing activities.

Policy disclosures and consistency:

• Both standards require entities to disclose the accounting policies used for the classification of cash flows, and to apply these policies consistently from period to period.

• Any significant judgments or estimates applied should be clearly explained in the notes.

These nuances can impact how cash generation, liquidity, and financing strategies are interpreted by investors and analysts, particularly for companies reporting under both frameworks or preparing cross-border financial statements.

Example of a basic statement of cash flows.

A well-structured cash flow statement offers a clear breakdown of the sources and uses of cash, allowing users to track each category and reconcile movements with changes in the balance sheet.

Line item	Amount ($)
Cash flows from operating activities
Net income	120,000
Depreciation and amortization	20,000
Change in working capital	(10,000)
Net cash from operating activities	130,000
Cash flows from investing activities
Purchases of equipment	(50,000)
Proceeds from sale of investments	15,000
Net cash from investing activities	(35,000)
Cash flows from financing activities
Proceeds from borrowings	40,000
Dividends paid	(10,000)
Repayment of borrowings	(20,000)
Net cash from financing activities	10,000
Net increase in cash	105,000
Opening cash balance	50,000
Closing cash balance	155,000

Key points in the example:

• Operating activities generate significant positive cash flow, indicating healthy core business performance.

• Investing activities reflect ongoing capital expenditure, with proceeds from some asset sales partially offsetting purchases.

• Financing activities include new borrowings, repayments, and dividends, providing insight into the company’s approach to capital structure and shareholder returns.

• The closing cash balance reconciles to the statement of financial position, ensuring integrity and traceability across statements.

Best practices for preparing and reviewing the statement of cash flows.

• Maintain accurate supporting schedules and reconciliations for all cash movements, ensuring every inflow and outflow is substantiated and traceable.

• Review policies for classification of interest, dividends, and taxes, and apply them consistently across periods.

• Reconcile all cash and cash equivalents to the amounts shown on the statement of financial position at both the beginning and end of the period, ensuring completeness and accuracy.

• Disclose significant non-cash transactions and foreign currency effects in the notes, so users are not misled by their absence from the statement.

• Monitor changes in standards and regulatory guidance affecting cash flow statement presentation, especially for entities preparing statements under both IFRS and US GAAP.

• Train staff and update accounting systems to capture and classify cash transactions in real-time, supporting the use of the direct method if desired and strengthening audit trails.

Consistent application of these best practices enhances the quality, transparency, and analytical usefulness of the statement of cash flows, meeting the expectations of global investors, regulators, and management.

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