Prepare a limited company statement of cash flows
Classify operating, investing and financing cash flows, reconcile net movement and explain the limits of cash-flow information.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons map all five Topic 3.1 objectives: financial-statement purpose; partnership changes; clubs and societies; manufacturing accounts; and limited-company financial statements and notes. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 adjustment and statement skills: apply accruals, distinguish capital from revenue, reconcile balances, and keep each entity's owners' funds separate from income and cash.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A company pays cash to buy production equipment. Which activity normally includes it?
What you will learn
- Classify company cash flows by activity
- Calculate net increase or decrease in cash and cash equivalents
- Reconcile opening cash to closing cash using the required format
Classify cash flows by purpose
Operating activities relate to the entity's principal revenue-producing activities. Investing activities include purchases and disposals of long-term assets and investments. Financing activities change the size or composition of contributed equity and borrowings, such as share issues or loan repayments.
For the syllabus's indirect operating calculation, start with profit from operations before tax and interest. Add depreciation and losses on disposal, deduct gains on disposal and investment income, then adjust for inventory, receivables and payables: increases in inventory/receivables use cash, while an increase in payables provides cash. Deduct interest and tax paid in the categories required by the stated policy.
Follow the IAS 7 format and policies required by the question. The official teacher guidance permits stated consistent policy choices for interest/dividend cash flows; tax is operating unless specifically identified with investing or financing. Noncash transactions do not appear as cash flows but may require disclosure elsewhere.
Reconcile to the cash balance
Net operating cash plus net investing cash plus net financing cash gives the net increase/decrease in cash and cash equivalents. Add opening cash and cash equivalents to arrive at the closing balance; confirm it agrees with the related statement of financial position balance using the same definition.
A cash-flow statement explains liquidity movements, not accounting profit. Depreciation is noncash; an asset purchase is a cash investing flow, while a gain on disposal in profit may need adjustment in an indirect operating section. Use the method and line items required in the question.
Pause and explain
Opening cash is $8,000 and the net increase is $3,500. What is closing cash?
Worked example
Net operating cash is $35,000, purchase of non-current assets $18,000, issue of shares $10,000, loan repayment $4,000 and dividends paid $1,000. Opening cash and equivalents are $12,000. Calculate net movement and closing cash.
Show the worked solution
- Investing cash flow = $(18,000).
- Financing cash flow = $10,000 − $4,000 − $1,000 = $5,000.
- Net increase = $35,000 − $18,000 + $5,000 = $22,000; closing cash = $12,000 + $22,000 = $34,000.
Answer Net increase in cash and cash equivalents is $22,000; closing cash and equivalents are $34,000.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Profit from operations is $50,000. Depreciation is $12,000; inventory increases by $3,000; receivables decrease by $2,000; payables increase by $4,000; interest paid is $5,000 and tax paid is $8,000. Calculate net cash from operating activities using the illustrated indirect format.
Give me a hint
Adjust operating profit for noncash items and working capital before deducting cash interest and tax paid.
Compare my reasoning
- Cash from operations = $50,000 + $12,000 − $3,000 + $2,000 + $4,000 = $65,000.
- Deduct interest paid $5,000 and tax paid $8,000.
- Net cash from operating activities = $65,000 − $5,000 − $8,000 = $52,000.
Net cash from operating activities is $52,000. The increase in inventory uses cash; decreases in receivables and increases in payables release cash.
Look for these in your work
- Depreciation added back
- Working-capital signs correct
- Interest and tax paid deducted
Operating activities generate $26,000; investing activities use $9,500; financing activities use $4,000; opening cash and cash equivalents are $7,500. Calculate net movement and closing balance.
Give me a hint
Keep each category's sign and reconcile the total to opening cash.
Compare my reasoning
- Net movement = $26,000 − $9,500 − $4,000 = $12,500.
- Closing cash = $7,500 + $12,500.
- Closing cash and equivalents = $20,000.
Net increase is $12,500 and closing cash is $20,000.
Look for these in your work
- Cash-flow signs correct
- Net movement correct
- Closing balance reconciled
A company reports a $10,000 profit but operating cash is negative $4,000. Give two possible accounting or working-capital explanations and one additional check a lender should make.
Give me a hint
Separate accrual profit from cash timing and noncash entries.
Compare my reasoning
- Credit sales may increase receivables without cash being collected yet.
- Profit may include noncash income or exclude cash payments that relate to earlier periods; inventory growth or supplier payments may also use cash.
- Inspect the indirect cash-flow reconciliation, working-capital changes, borrowing terms and near-term cash forecast.
Profit uses accrual accounting, so receivables, inventory, payables and noncash items can make operating cash different. The lender should inspect the reconciliation, working capital and forecasts before assessing repayment capacity.
Look for these in your work
- Receivable timing considered
- Noncash or inventory effect considered
- Further check recommended
Common mistakes
- Classifying asset purchases as operating expenses in the cash-flow statement
- Adding closing cash to rather than reconciling from opening cash
What can you explain now?
How is a new ordinary share issue normally classified in a statement of cash flows?
Compare with the explanation
Financing activity
An equity issue changes the company's financing and contributed capital.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Name the three IAS 7 activity categories and state how opening cash reconciles to closing cash.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.