IAS 7 statement of cash flows: a plain-English guide with a worked example

Short answer: IAS 7 Statement of Cash Flows is the accounting standard that sets out how a company reporting under IFRS shows the cash that came in and went out during the year. It sorts every cash movement into three sections, operating, investing and financing activities, which together explain the change in cash and cash equivalents from the start of the year to the end. Operating cash can be shown by the direct method (cash received and paid, which IAS 7 encourages) or the indirect method (profit adjusted for non-cash items and working capital, which most companies use). Today a company may choose where interest and dividends go, as long as it is consistent; from annual periods beginning on or after 1 January 2027, IFRS 18 removes most of that choice. Australia applies it as AASB 107 and New Zealand as NZ IAS 7, with the same requirements. Most small UK companies do not use IAS 7 at all: they report under FRS 102, and a small company there does not have to prepare a cash flow statement.

What IAS 7 requires

Requirement	What it means in practice
Three sections	Operating (the main trading), investing (buying and selling long-term assets and investments), financing (loans, leases, shares and dividends paid)
Cash and cash equivalents	Cash plus short-term, highly liquid investments with an insignificant risk of changes in value, usually maturing within three months of acquisition. A bank overdraft repayable on demand can be included when it is part of day-to-day cash management
Operating cash: direct or indirect	Either method is allowed. The direct method is encouraged; the indirect method is far more common
Interest and dividends	Shown separately and classified the same way every year. Until IFRS 18 applies, interest paid can be operating or financing, and interest and dividends received operating or investing
Income taxes	Shown separately, in operating activities unless a tax payment can be specifically tied to an investing or financing item
Gross, not net	Major receipts and payments in investing and financing are shown separately (a new loan and a repayment are two lines, not one net figure)
Non-cash transactions left out	Equipment bought on finance or a lease, or a debt swapped for shares, is not a cash flow. It is described in a note instead
Reconciliation of financing liabilities	A note showing how loans and lease liabilities moved: cash drawn and repaid, plus non-cash changes such as new leases
Supplier finance arrangements	Since 2024, a note on any arrangement where a finance provider pays suppliers and the company pays the provider later

Leases under IFRS 16 follow the same logic: the principal part of each lease payment is financing, the interest part follows the company’s interest policy, and payments for short-term and low-value leases stay in operating activities.

A worked example: a plumbing supplies wholesaler

These figures are made up. Harbour Plumbing Supplies Pty Ltd sells pipes and fittings to plumbers around Newcastle, New South Wales. Its bank asks for financial statements prepared under Australian Accounting Standards each year, so it applies AASB 107, which is IAS 7 in Australian dress. To keep the sums readable every figure excludes GST.

Year to 30 June 2026	$
Sales	900,000
less cost of sales	(540,000)
less operating expenses, including 30,000 depreciation	(250,000)
Operating profit	110,000
less interest on the bank loan	(20,000)
plus interest earned on the business savings account	2,000
Profit before tax	92,000
less income tax at 25%	(23,000)
Profit after tax	69,000

Brackets are minus figures. During the year, money owed by customers rose by $15,000, stock rose by $10,000 and money owed to suppliers rose by $5,000. The company paid $18,000 of tax (last year’s bill), bought a forklift and racking for $45,000, sold an old van for its book value of $8,000, repaid $40,000 of the bank loan and paid the two shareholders $30,000 of dividends. Interest was paid and received in cash as it fell due. Cash at the bank went from $60,000 to $37,000.

Operating activities, indirect method (interest in operating)

	$
Profit before tax	92,000
add depreciation	30,000
add interest expense, less interest income (shown as cash lines below)	18,000
less increase in trade receivables	(15,000)
less increase in inventories	(10,000)
add increase in trade payables	5,000
Cash generated from operations	120,000
Interest paid	(20,000)
Interest received	2,000
Income tax paid	(18,000)
Net cash from operating activities	84,000

The same operating cash, direct method

	$
Cash received from customers (900,000 − 15,000)	885,000
Cash paid to suppliers and employees	(765,000)
Cash generated from operations	120,000
Interest paid, interest received and income tax paid, as above	(36,000)
Net cash from operating activities	84,000

Payments to suppliers and employees are the cost of sales (540,000) plus the extra stock bought (10,000), less the 5,000 more owed to suppliers, plus the operating expenses that were paid in cash (250,000 − 30,000 depreciation = 220,000): 540,000 + 10,000 − 5,000 + 220,000 = 765,000. Both methods reach the same figure; only the way the operating section is written changes.

The full statement

	$
Net cash from operating activities	84,000
Purchase of property, plant and equipment	(45,000)
Proceeds from sale of the van	8,000
Net cash used in investing activities	(37,000)
Repayment of the bank loan	(40,000)
Dividends paid	(30,000)
Net cash used in financing activities	(70,000)
Net decrease in cash and cash equivalents	(23,000)
Cash and cash equivalents at 1 July 2025	60,000
Cash and cash equivalents at 30 June 2026	37,000

The company made $69,000 after tax and still has $23,000 less in the bank, and the statement says why: $20,000 went into customers and stock, and the forklift, loan repayments and dividends took $115,000 between them.

The same year after IFRS 18

IFRS 18 (AASB 18 in Australia, NZ IFRS 18 in New Zealand) amends IAS 7 for annual periods beginning on or after 1 January 2027, so for a June year end the first year is the one to 30 June 2028, with the year before restated for comparison. For a company whose main business is not lending or investing, it makes three changes: interest paid goes to financing, interest and dividends received go to investing, and the indirect method starts from operating profit instead of profit before tax.

	Today (interest in operating)	After IFRS 18
Net cash from operating activities	84,000	102,000
Net cash used in investing activities	(37,000)	(35,000)
Net cash used in financing activities	(70,000)	(90,000)
Net decrease in cash	(23,000)	(23,000)

Under IFRS 18 the indirect method reads: operating profit 110,000, add depreciation 30,000, less the 20,000 working capital increase, less 18,000 tax paid = 102,000. The 2,000 of interest received joins investing and the 20,000 of interest paid joins financing. The bank balance does not move by a dollar, but operating cash looks $18,000 better, which matters if a loan covenant or a buyer’s valuation uses operating cash flow. Agree with the bank which version a covenant is tested on before the change arrives.

Who has to apply IAS 7

• Australia. Companies that prepare financial statements under Australian Accounting Standards apply AASB 107, whether they use Tier 1 or the Tier 2 Simplified Disclosures (AASB 1060 still includes a statement of cash flows). Most small proprietary companies do not have to prepare financial reports under the Corporations Act at all, unless shareholders or ASIC direct them to, so many never prepare one for statutory purposes. A bank or a buyer may still ask for one.
• New Zealand. NZ IAS 7 applies to entities reporting under NZ IFRS. Most small companies are not required to prepare general purpose financial statements and prepare special purpose reports to the IRD’s minimum requirements, which do not include a statement of cash flows.
• United Kingdom. Listed groups use UK-adopted IAS 7. Most private companies report under FRS 102, whose Section 7 has the same three sections. A small company under FRS 102 is not required to prepare a statement of cash flows, whether or not it uses the Section 1A small entity regime, and micro-entities under FRS 105 do not prepare one either.

Even where nobody requires it, the statement is the clearest way to answer “where did the profit go?” For a reader-friendly version built from a small business’s own year, see the cash flow statement example.

How to prepare it from Xero

1. Run the Statement of Cash Flows under Accounting › Reports for the financial year. It uses the direct method, built from the bank transactions, and groups them into operating, investing and financing using each account’s type (how to read it). Check that every bank account is reconciled to the year end first.
2. Check the classification against your policy. Xero sorts by account, not by IAS 7. Interest paid usually lands in operating activities, a director’s loan may sit in financing or operating, and asset purchases coded to an expense account will be in operating. Move items in your working papers, not by recoding the ledger.
3. Build the indirect method from the Profit and Loss for the year and the Balance Sheet at both year ends: profit before tax, add back depreciation and other non-cash items, then the movement in debtors, stock and creditors. The operating total must match step 1 after reclassifications; if it does not, look for unreconciled lines, transfers coded as income, and GST or payroll liabilities.
4. Take out non-cash items. Equipment bought on finance or a new lease is a non-cash addition: leave it out of investing and financing and note it, then show the repayments as financing.
5. Write the financing liabilities note. For each loan and lease: opening balance, cash drawn, cash repaid, new leases and other non-cash changes, closing balance. The Balance Sheet gives the balances, and the loan statements give the cash.
6. Tie it to the bank. The closing cash and cash equivalents must equal the bank balances on the Balance Sheet, less any overdraft you treat as part of cash.

In Australia, AASB Interpretation 1031 has cash flows shown including GST, with the GST paid to or refunded by the ATO in operating activities, so a real AASB 107 statement will not match the GST-free figures above line by line. Menu names move between Xero releases and regions, so search Xero Central for the report name if your screen differs.

Common mistakes

• Netting investing or financing flows. A $100,000 loan drawn and $40,000 repaid are two lines, not $60,000 of new borrowing.
• Putting non-cash additions in investing. Equipment on hire purchase or a new lease has not used cash yet. Only the repayments are cash, and they are financing.
• Classifying interest one way this year and another way next year. The choice has to be applied consistently until IFRS 18 removes it.
• Starting the indirect method from the wrong line. Starting from profit after tax without adding the tax charge back, then deducting tax paid, takes tax off twice. Start from profit before tax (or add the tax charge back) and show tax paid as its own line.
• Treating every bank balance as cash. A term deposit of six months is not a cash equivalent; it is an investment, and placing it is an investing outflow.
• Trusting Xero’s grouping without a review. The report follows account types, which were set up for bookkeeping, not for IAS 7.

Common questions

What is IAS 7? IAS 7 Statement of Cash Flows is the international accounting standard for the cash flow statement. It requires companies reporting under IFRS to show the year’s cash receipts and payments in three groups, operating, investing and financing, reconciled to the change in cash and cash equivalents.

What are the three types of cash flow under IAS 7? Operating activities are the main revenue-producing activities, such as cash from customers and payments to suppliers and staff. Investing activities are buying and selling long-term assets and investments. Financing activities are borrowing and repaying loans, lease principal, issuing shares and paying dividends.

Does IAS 7 require the direct or the indirect method? Either is allowed for operating activities. IAS 7 encourages the direct method because it shows the actual receipts and payments, but most companies use the indirect method. Investing and financing are always shown as gross receipts and payments.

Where does interest paid go under IAS 7? Until IFRS 18 applies, a company chooses operating or financing for interest paid, and operating or investing for interest and dividends received, and keeps the same choice every year. From annual periods beginning on or after 1 January 2027, a company whose main business is not lending or investing puts interest paid in financing and interest received in investing.

What counts as a cash equivalent under IAS 7? A short-term, highly liquid investment that converts to a known amount of cash with an insignificant risk of a change in value, usually one maturing within three months of the date it was acquired. A bank overdraft repayable on demand can be included when it is part of the company’s cash management.

Do small businesses have to prepare an IAS 7 cash flow statement? Usually not. In the UK a small company under FRS 102 is exempt from preparing one, most small New Zealand companies prepare tax-based reports without one, and most small Australian proprietary companies do not prepare statutory financial reports. Banks and buyers can still ask for one, and it is the clearest way to see where the profit went.

See where the cash went every week, not once a year

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: sales and profit against last month and the same month last year, the cash in the bank against the end of last month, money owed to you that is past due and by whom, and bills due in the next two weeks against your cash. Bookkeepers can send the same email to each client under the practice’s name. It does not prepare IAS 7 statements, but it shows each week whether the cash is following the profit. It asks Xero for read-only access, and there is a 14-day free trial with no card.