IFRS statement of cash flows and what it shows

Why a cash flow statement is needed

Profit is measured on an accrual basis: revenue is recognised on shipment, an expense when the obligation arises. Cash moves to a different rhythm, and the gap between profit and the bank balance can be significant.

The statement of cash flows bridges this gap. It shows whether core operations generate cash or whether the business lives on borrowings and asset sales — a conclusion that cannot be replaced by explanations.

That is why the statement is often read first: it is harder to dress up. Accruals can be interpreted in different ways, but movements of money through accounts either happened or they did not.

Three sections: operating, investing and financing activities

Flows are classified by nature. Operating activities are the company's core work: receipts from customers, payments to suppliers, wages, taxes. This section shows whether the business is viable.

Investing activities reflect investments in long-term assets and proceeds from their sale. Financing activities cover relations with owners and lenders: raising and repaying loans, capital contributions, payments to participants.

A classification error does not change the closing cash balance, but it radically changes the picture for the user: an outflow placed in the wrong section can turn a loss-making operating cash flow into a positive one.

• operating activities — receipts and payments from core operations
• investing activities — long-term assets and investments
• financing activities — equity, borrowings and settlements with owners
• interest, dividends and income tax are disclosed separately

Direct and indirect methods

The direct method shows gross receipts and payments by type: received from customers, paid to suppliers, paid to employees. It is clearer, but requires data that are not always easy to extract from the accounting system.

The indirect method starts from profit and adjusts it for non-cash items and changes in working capital. It is easier to prepare and more common in practice, though less obvious to an untrained reader.

The choice of method is a matter not only of convenience but also of what information the company is prepared to disclose. We usually look at how the accounting system is set up and recommend the option the company can reproduce every period without manual reconstruction.

What counts as cash and cash equivalents

Besides cash on hand and in bank accounts, the statement includes cash equivalents — short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.

The line is finer than it seems: a deposit with withdrawal restrictions or funds blocked as collateral are not cash equivalents. Such amounts are disclosed separately, otherwise the user will overestimate the company's liquidity.

Typical preparation errors

The most common is building the statement «from balance sheet movements» without analysing actual turnover. This approach hides large offsetting movements and distorts the sections, even though the total formally reconciles.

The second is netting flows: proceeds and repayment of a loan are shown on one line, so information on the real volume of borrowing disappears. The third is foreign currency transactions translated at an average rate without isolating exchange differences.

• a flow classified in the wrong activity section
• netted receipts and payments instead of gross amounts
• non-cash transactions included in the statement
• restricted funds treated as cash equivalents
• the statement total not matching the balance sheet

How the statement is tested in an audit

Testing begins with the arithmetic: the net movement plus the opening balance must equal the closing balance, which in turn must agree with the balance sheet. Then large flows are traced on a sample basis to primary documents and bank statements.

Classification is analysed separately: the auditor checks whether the operating picture has been improved by moving payments to other sections. Non-cash transactions, such as acquiring an asset in exchange for a liability, must be disclosed but not included in the flows.

How Leader Audit helps with financial statements

Over 13 years of practice, Leader Audit has carried out more than 220 audits and helped clients recover more than UZS 200 billion in VAT.

We help companies in Uzbekistan set up IFRS reporting so that the statement of cash flows is built from accounting data rather than reconstructed by hand at year-end.