Limited Company Accounting

Statement of Cash Flows — Operating Activities

What Is the Statement of Cash Flows?

The statement of cash flows is a financial statement (unlike the schedule of NCA and statement of changes in equity, which are notes). It is prepared in accordance with IAS 7 using the indirect method.

It reconciles the profit figure from the income statement to the actual cash generated or used during the period.

Profit vs Cash Flow

Operating Activities — Indirect Method

Start with profit from operations (before interest and tax), then adjust:

Operating Activities                                   £
Profit from operations                               xxx
Add: Depreciation                                    xxx
Add/(Less): Loss/(Profit) on disposal of NCA         xxx
(Less)/Add: Increase/(Decrease) in inventories      (xxx)
Add/(Less): Decrease/(Increase) in trade receivables xxx
Add/(Less): Increase/(Decrease) in trade payables    xxx
──────────────────────────────────────────────────────────
Cash from operating activities                       xxx
Less: Interest paid                                 (xxx)
Less: Corporation tax paid                          (xxx)
──────────────────────────────────────────────────────────
Net cash from operating activities                   xxx

Adjustments Explained

Depreciation — always added back. It is a non-cash expense that reduced profit but did not reduce cash.

Profit on disposal — deducted (it inflated profit but the cash effect appears separately in investing activities as proceeds).

Loss on disposal — added back (it reduced profit but the cash effect is the proceeds in investing activities).

Working capital changes:

Inventories and trade receivables move in the same direction (both assets). Trade payables move in the opposite direction (liability).

Interest paid — deducted after "cash from operating activities".

Corporation tax paid — the amount actually paid in the year (may differ from the IS charge — see Section 7).