IAS 7 statement of cash flows explained

The statement of cash flows is often the statement users trust most, because cash is hard to manipulate. This guide explains what IAS 7 requires: what counts as cash, how flows are classified into the three activities, the direct and indirect methods, and what changes when IFRS 18 applies from 2027.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

IAS 7 requires a statement of cash flows that shows how cash and cash equivalents changed during the period, classified into operating, investing and financing activities. Operating cash flows can be presented using the direct method, showing gross receipts and payments, or the indirect method, starting from profit and adjusting for non-cash items and working capital. Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash, usually with a maturity of three months or less.

At a glance

Shows
Change in cash and cash equivalents
Activities
Operating, investing, financing
Operating methods
Direct or indirect
Cash equivalents
Usually maturity of 3 months or less
From 2027
IFRS 18 changes classifications
Excel
Cash flow statement template
IAS 7 statement of cash flows explainedShows: Change in cash and cash equivalents; Activities: Operating, investing, financing; Operating methods: Direct or indirect; Cash equivalents: Usually maturity of 3 months or less; From 2027: IFRS 18 changes classifications; Excel: Cash flow statement template.KEY FACTS AT A GLANCEIAS 7 statement of cash flows explainedShowsChange in cash and cashequivalentsActivitiesOperating, investing,financingOperating methodsDirect or indirectCash equivalentsUsually maturity of 3months or lessFrom 2027IFRS 18 changesclassificationsExcelCash flow statementtemplateChecked against official sourcesTax BakersIAS 7 statement of cash flows explainedShows: Change in cash and cash equivalents; Activities: Operating, investing, financing; Operating methods: Direct or indirect; Cash equivalents: Usually maturity of 3 months or less; From 2027: IFRS 18 changes classifications; Excel: Cash flow statement template.KEY FACTS AT A GLANCEIAS 7 statement of cash flowsexplainedShowsChange in cash and cash equivalentsActivitiesOperating, investing, financingOperating methodsDirect or indirectCash equivalentsUsually maturity of 3 months or lessFrom 2027IFRS 18 changes classificationsExcelCash flow statement templateChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What are the three activities in IAS 7?

The three activities in a statement of cash flowsThe three activities in a statement of cash flowsWhat goes hereExamplesOperatingDay-to-day tradingCustomers, suppliers,staff, income taxesInvestingLong-term assetsand investmentsCapital expenditure,disposalsFinancingEquity andborrowingsLoans, leases,dividends paid
Every cash flow belongs to one of the three activities.
  • Operating activities: the principal revenue-producing activities and other activities that are not investing or financing, such as cash from customers, payments to suppliers and employees, and income taxes paid.
  • Investing activities: buying and selling long-term assets and investments not included in cash equivalents, such as property, plant and equipment, intangibles and shares in other companies.
  • Financing activities: changes in the size and composition of equity and borrowings, such as issuing shares, taking out and repaying loans, lease principal payments and dividends paid.

What counts as cash and cash equivalents?

Cash on hand and demand deposits, plus cash equivalents: short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, normally with a maturity of three months or less from acquisition. Equity investments are not cash equivalents, and nor are deposits with longer original maturities. Bank overdrafts repayable on demand that form an integral part of cash management are included as a deduction.

An example statement of cash flows

CU millionAmount
Net cash from operating activities354
Net cash used in investing activities: capital expenditure 260, disposal proceeds 40, interest and dividends received 20(200)
Net cash used in financing activities: borrowings 120, repayments 90, lease principal 60, interest paid 66, dividends 40(136)
Net increase in cash and cash equivalents18
Cash at the start of the year50
Cash at the end of the year68

This layout follows IFRS 18, which applies from 2027 and puts interest paid in financing and interest and dividends received in investing for most companies. Until then, IAS 7 lets companies choose where to classify interest and dividends, applied consistently. See the IFRS 18 cash flow changes.

Direct or indirect method?

The direct method shows gross cash receipts from customers and payments to suppliers and employees. IAS 7 encourages it, but most companies use the indirect method, which starts from profit, or operating profit under IFRS 18, and adjusts for non-cash items, working capital changes and items that belong in investing or financing.

What about non-cash transactions?

Investing and financing transactions that do not use cash, such as acquiring an asset through a lease or converting debt to equity, are excluded from the statement and disclosed in the notes. Companies also reconcile the movements in liabilities from financing activities, separating cash flows from non-cash changes such as new leases and exchange differences.

What other rules apply?

  • Foreign currency cash flows are translated at the rates at the dates of the cash flows, or an average that approximates them; the effect of exchange rate changes on cash held is shown separately.
  • Cash flows from obtaining or losing control of subsidiaries are shown separately in investing activities.
  • Some flows may be reported net, such as receipts and payments on behalf of customers, or items with quick turnover, large amounts and short maturities.

Build your own statement in the Cash flow statement template (Excel). For US GAAP differences, see IAS 7 vs ASC 230.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What is IAS 7?

The IFRS standard on the statement of cash flows, which classifies cash flows into operating, investing and financing activities.

What are cash equivalents under IAS 7?

Short-term, highly liquid investments readily convertible to known amounts of cash with an insignificant risk of change in value, usually maturing within three months.

What is the difference between the direct and indirect methods?

The direct method shows gross receipts and payments; the indirect method starts from profit and adjusts for non-cash items and working capital.

Where are lease payments shown in the cash flow statement?

Lease principal payments are financing activities; interest follows the company's classification, financing for most companies under IFRS 18.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 7 Statement of Cash Flows

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 7The indirect method step by stepIFRS 18IFRS 18 and the cash flow statement: the IAS 7 changesIFRS vs US GAAPIAS 7 vs ASC 230: cash flow statement differences

More in IAS 7

TopicAll 3 guides in IAS 7

This guide is general information. It is not tax or legal advice for your situation.