A company can show a profit and still run out of cash. Profit is an opinion built on accounting rules. Cash is a fact. The statement of cash flows shows where the cash came from and where it went, so readers can judge whether the business can pay its bills, repay its loans and fund its dividends.
This topic covers International Accounting Standard (IAS) 7 for a single entity: the definition of cash, the three headings, the direct and indirect methods, the calculation of interest, tax, working capital, asset purchases, share issues, loans and dividends, and the reconciliation of liabilities from financing. The next topic covers the consolidated statement of cash flows. The latest Pathfinder diets have no stand-alone cash flow question, but it is examinable.
In 30 seconds
The statement of cash flows explains the change in cash and cash equivalents under three headings: operating (the main revenue activities), investing (buying and selling non-current assets and investments) and financing (changes in equity and borrowings).
Under the indirect method start with profit before tax, add back non-cash items (depreciation, loss on disposal, finance costs), then adjust for working capital: an increase in inventory or receivables is deducted; an increase in payables is added. Interest and tax paid are worked out as opening liability + charge − closing liability. Purchases of assets are the balancing figure in the asset account.
Show cash from shares, loans and dividends in financing. From 2027, a new standard changes the starting point and removes the choices for interest and dividends (see below).
Key terms in plain English
| Term | What it means |
|---|---|
| Cash | Cash on hand and demand deposits |
| Cash equivalents | Short-term, highly liquid investments (three months or less from acquisition) that convert to known amounts of cash with little risk of change in value |
| Operating activities | The main revenue-producing activities |
| Investing activities | Acquiring and disposing of non-current assets and other investments |
| Financing activities | Changes in the size and make-up of equity and borrowings |
| Indirect method | Start with a profit figure and adjust it to get cash from operations |
| Direct method | Show cash received from customers and cash paid to suppliers and others |
| Non-cash item | An expense or income that does not move cash, such as depreciation |
Syllabus check
IAS 7 is examinable under syllabus area C. This topic covers:
- preparing a statement of cash flows, and extracts from it, for a single entity;
- the changes in liabilities arising from financing activities.
CAMA 2020 and the statement of cash flows
The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow International Financial Reporting Standards (IFRS) and give a true and fair view.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 377(1) and s. 378 | Directors prepare statements that follow IFRS and give a true and fair view | The statement of cash flows is part of a complete set |
| ss. 379 to 381 | The provisions on group accounts, as ICAN teaches them | A parent also presents a group statement of cash flows |
| s. 374(1) | The company keeps accounting records | Cash records support every figure |
| s. 385 | The directors’ report covers performance and risk | Liquidity and funding are discussed |
| s. 404(7) | The audit committee reviews policies and internal control | It can review cash controls and the classification choices |
Format and methods
IAS 7 does not set a fixed format. It gives examples. The statement groups the cash flows under three headings and ends with the change in cash and cash equivalents, added to the opening balance to give the closing balance. Any effect of exchange rate changes on foreign currency cash is shown separately.
Operating cash flows
Either method may be used. The standard encourages the direct method but the indirect method is used far more. Only the way cash generated from operations is shown differs. Everything below it is the same.
Indirect method: start with profit before tax, add back non-cash items and finance costs, deduct investment income (it is shown in investing), then adjust for working capital.
| Balance | Increase in the year | Decrease in the year |
|---|---|---|
| Receivables | Deduct | Add |
| Inventory | Deduct | Add |
| Payables | Add | Deduct |
Direct method: cash received from customers, less cash paid to suppliers and for operating expenses, then tax and interest as before. It is easier to read but needs more data.
Interest and tax paid
- Interest paid = opening interest payable + charge for the year − closing interest payable.
- Tax paid = opening tax liability + charge − closing tax liability. Include deferred tax in all three balances and in the charge. Deferred tax is not a cash item, but it is in the tax charge.
Investing activities
- Purchase of property, plant and equipment: a balancing figure in the movement of the asset. Opening balance + additions − disposals − depreciation + revaluation = closing balance. Use the carrying amount or cost and accumulated depreciation, but be consistent. Remember any assets bought on credit or by lease, which are not cash.
- Proceeds of disposal: carrying amount at disposal plus the profit (or less the loss).
- Investments: purchases and sales in the same way. Ignore fair value gains, which are non-cash.
- Interest and dividends received may be shown here (see the change below).
Financing activities
- Share issues: (closing share capital + share premium) − (opening share capital + share premium) − any bonus issue. A bonus issue from retained earnings or premium is not cash.
- Loans: the change in total borrowings (current and non-current). An increase is an inflow and a decrease is a repayment.
- Lease payments: the repayment of the lease liability is financing. The interest part is treated as interest paid.
- Dividends paid: opening retained earnings + profit for the year − closing retained earnings (adjust for any bonus issue or transfer from other reserves).
- Redemption costs (such as a penalty on early repayment of a loan) are usually shown with the repayment.
Changes in liabilities arising from financing activities
The entity discloses a reconciliation (or other disclosure) of the opening and closing liabilities from financing activities. It shows the cash flows, the changes from gaining or losing control of subsidiaries, and other non-cash changes such as exchange rate effects.
The change from 2027
International Financial Reporting Standard (IFRS) 18 amends IAS 7 when it becomes effective (annual periods beginning on or after 1 January 2027). There are two changes: (1) the indirect method must start from operating profit or loss as defined in IFRS 18, not profit before tax; and (2) the choices for interest and dividends are removed.
For an entity with no specified main business activity, interest paid and dividends paid are financing cash flows and interest and dividends received are investing cash flows. Entities with financing or investing as a main business classify them by that business.
The rules in more depth
Why profit is not cash
Profit includes depreciation, which uses no cash, and credit sales, which have not yet been paid. The adjustments undo those.
Why working capital moves the other way
If receivables grow, customers have taken more goods without paying, so cash is lower than profit. If payables grow, the company has kept cash by delaying payment.
Why some items sit in investing
Investment income is the result of an investing decision, so removing it from operating and showing it under investing puts like with like.
Effect on analysis
Analysts compare cash from operations with profit. If profit is much higher than cash for several years, the quality of earnings is in doubt.
Worked examples
Example 1: interest paid. The interest payable balance was ₦4,000 at the start of the year and ₦3,000 at the end. The charge in profit or loss was ₦22,000.
- 4,000 + 22,000 − 3,000 = ₦23,000 paid.
Example 2: tax paid with deferred tax. Current tax payable was ₦53,000 at the start and ₦61,000 at the end. Deferred tax was ₦20,000 and ₦30,000. The tax expense was ₦87,000 (current ₦77,000 and deferred ₦10,000).
- Opening total.
53,000 + 20,000 = 73,000.
Closing total = 61,000 + 30,000 = 91,000. - Tax paid.
73,000 + 87,000 − 91,000 = ₦69,000.
Example 3: purchases and disposals of equipment. Grand Company had property, plant and equipment with a carrying amount of ₦1,050,000 at the start and ₦1,525,000 at the end. Property was revalued up by ₦200,000. Equipment with a cost of ₦260,000 and accumulated depreciation of ₦240,000 was sold at a profit of ₦25,000. Depreciation was ₦265,000.
- Carrying amount of the disposal.
260,000 − 240,000 = ₦20,000.
Proceeds = 20,000 + 25,000 = ₦45,000. - 1,050,000 − 20,000 − 265,000 + 200,000 + additions = 1,525,000.
Additions = ₦560,000.
Example 4: a share issue with a bonus issue. Share capital was ₦600,000 and share premium ₦800,000 at the start. At the end they were ₦750,000 and ₦1,100,000. A 1 for 6 bonus issue was made from retained earnings during the year, followed by a rights issue for cash.
- Closing 1,850,000 − opening 1,400,000 = 450,000.
- Bonus issue.
1/6 × 600,000 = 100,000 (not cash). - Cash from shares.
450,000 − 100,000 = ₦350,000.
Example 5: shares, loans and dividends. Share capital rose from ₦400,000 to ₦500,000 and share premium from ₦275,000 to ₦615,000. Retained earnings rose from ₦390,000 to ₦570,000. Profit after tax was ₦420,000. Non-current loans fell from ₦600,000 to ₦520,000 and current loans from ₦80,000 to ₦55,000.
- Cash from shares.
(500,000 + 615,000) − (400,000 + 275,000) = ₦440,000 (no bonus issue). - Loans: opening 680,000, closing 575,000. Repayment of ₦105,000.
- Dividends = 390,000 + 420,000 − 570,000 = ₦240,000.
Example 6: a full statement (Elida, ₦’000). Profit before tax 440 after a loss on sale of plant of 90, depreciation of 280, an early loan redemption penalty of 20 (in administrative expenses), finance costs of 50 and investment property income and gains of 60 (rent 40 and a fair value gain of 20). Opening and closing: inventory 810 and 1,210; receivables 540 and 480; payables 1,050 and 1,410; warranty provision 100 and 200. Plant with a carrying amount of 240 was sold.
Property was revalued up by 100. Property, plant and equipment was 1,860 and 2,880. Share capital and premium together were 600 at the start and 1,600 at the end. Loan notes of 400 were repaid. The tax asset was 50 at the start; current tax payable is 150 at the end; deferred tax moved from 30 to 50; the tax charge was 160. A dividend of 3 kobo was paid on 5,000 thousand shares. The overdraft at the start was 120.
- Operating:
440 + 90 + 280 + 20 + 50 − 60 + 100 (provision) = 920.
Inventory (400); receivables +60; payables +360.
Cash generated = 940.
Interest paid (50).
Tax received: opening net balance was an asset of 20 (50 − 30); closing liability is 200 (150 + 50); paid = −20 + 160 − 200 = −60, so 60 was received.
Net operating = 940 − 50 + 60 = 950. - Investing:
proceeds of plant (240 − 90) 150; purchases of plant (balancing: 1,860 + 100 + additions = 240 + 280 + 2,880, so 1,440) (1,440); investment property rent 40.
Net = (1,250). - Financing: shares issued (1,600 \u2212 600) 1,000; loan notes repaid (400); penalty (20); dividend (5,000 × 0.03) (150).
Net = 430. - Net increase.
950 − 1,250 + 430 = 130.
Opening overdraft (120) so closing cash = 10.
How to score full marks
- Set out the workings for tax, interest, asset purchases, share issues and dividends and label them.
- Show every adjustment in the reconciliation of profit before tax with a sign.
- Deduct investment income from operating and include it in investing.
- Watch for non-cash items: bonus issues, assets under leases, revaluations, and fair value gains.
- Check the closing figure against the cash in the statement of financial position.
- State the choices made for interest and dividends, or follow the IFRS 18 rule if the question says so.
Common mistakes in the exam
- Adding an increase in inventory or receivables.
- Forgetting deferred tax in the tax paid working.
- Taking all of the movement in share capital as cash when there was a bonus issue.
- Putting depreciation in the investing section.
- Showing profit on disposal as a cash flow rather than the proceeds.
- Not removing investment income from the operating reconciliation.
- Treating a tax refund as a payment.
Quick revision
- Three headings: operating, investing, financing.
- Indirect method: profit before tax, add back non-cash items, adjust for working capital.
- Interest and tax: opening + charge − closing.
- Asset purchases are the balancing figure. Disposal proceeds = carrying amount ± profit or loss.
- Shares: change in capital and premium less bonus issue. Dividends: from retained earnings.
- From 2027: operating profit is the starting point and interest and dividends are classified by rule.
- CAMA 2020: ss. 377(1), 378, 379 to 381, 374(1), 385, 404(7).
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. Under the indirect method, an increase in trade receivables is:
- Added to profit
- Deducted from profit
- Ignored
- Shown in financing
Show the answer
B. Cash is lower than profit.
Question 2. Depreciation is shown in the reconciliation as:
- A deduction
- An addition
- An investing cash flow
- A financing cash flow
Show the answer
B. It is a non-cash expense.
Question 3. Tax paid equals:
- The charge
- Opening liability + charge − closing liability
- Closing liability
- The deferred tax movement
Show the answer
B. Include deferred tax.
Question 4. A bonus issue is:
- A cash inflow
- Not a cash flow
- An investing flow
- A dividend
Show the answer
B. Deduct it from the movement in share capital and premium.
Question 5. Proceeds of an asset sold at a loss equal:
- Carrying amount plus the loss
- Carrying amount less the loss
- The cost
- The depreciation
Show the answer
B. Proceeds = carrying amount − loss.
Question 6. Cash equivalents mature within:
- One month
- Three months of acquisition
- Six months
- One year
Show the answer
B. And have an insignificant risk of change in value.
Question 7. The repayment of the lease liability is a:
- Operating flow
- Financing flow
- Investing flow
- Non-cash item
Show the answer
B. The interest part is treated as interest paid.
Question 8. The effect of exchange rates on cash held in foreign currency is shown:
- In operating activities
- Separately
- In investing activities
- Not at all
Show the answer
B. It is not an activity cash flow.
Question 9. From 2027 the indirect method starts from:
- Profit before tax
- Operating profit as defined in IFRS 18
- Net profit
- Revenue
Show the answer
B. Through the amendment to IAS 7.
Question 10. Which section of CAMA 2020 requires the statements to follow IFRS?
- Section 378
- Section 400
- Section 405
- Section 409
Show the answer
A. IAS 7 is part of IFRS.
Written questions
Question 11 (10 marks). (a) Explain the purpose of the statement of cash flows and the three headings. (5 marks) (b) Distinguish the direct and indirect methods, and state the two changes made by IFRS 18. (5 marks)
Question 12 (20 marks). Kano Plc. Statement of profit or loss for 20X8 (₦m): revenue 900; cost of sales (560) including depreciation of 60; other expenses (150); loss on disposal of equipment (10); finance costs (20); profit before tax 160; tax (50); profit 110. Statement of financial position, 20X8 and 20X7 (₦m):
- property, plant and equipment 450 and 400
- inventory 100 and 80
- receivables 60 and 70
- cash 180 and 30
- share capital 250 and 200
- share premium 60 and 40
- retained earnings 230 and 160
- loans 150 and 100
- payables 65 and 50
- tax payable 35 and 30
Equipment with a carrying amount of 25 was sold. Interest paid equals the finance cost. (a) Calculate the tax paid and the purchases of property, plant and equipment. (4 marks) (b) Prepare the statement of cash flows using the indirect method. (12 marks) (c) State the operating and financing cash flows if IFRS 18 applied. (4 marks)
Question 13 (10 marks). Share capital rose from ₦300 to ₦400 and share premium from ₦120 to ₦200. A bonus issue of ₦50 was made from retained earnings. Retained earnings rose from ₦200 to ₦240 and profit after tax was ₦100. Loans were ₦40 (current) and ₦160 (non-current) at the start and ₦30 and ₦120 at the end. (a) Calculate the cash from the share issue. (4 marks) (b) Calculate the dividend paid. (3 marks) (c) Calculate the cash flow on loans. (3 marks)
Model answers
Show the model answer to Question 11
(a) Purpose (5 marks). It shows how the entity generates and spends cash and explains the change in cash and cash equivalents. (2) Operating activities are the main revenue-producing activities. (1) Investing activities are the purchase and sale of non-current assets and investments. (1) Financing activities are changes in equity and borrowings. (1)
(b) Methods (5 marks). The direct method shows cash received from customers and paid to suppliers. (1.5) The indirect method starts with a profit figure and adjusts for non-cash items and working capital. (1.5) The results are the same. (0.5) IFRS 18 changes the starting point to operating profit or loss. (1) It removes the choices for interest and dividends. (0.5)
Show the model answer to Question 12
(a) Workings (4 marks).
- Tax paid.
30 + 50 − 35 = ₦45m. (2) - Additions.
400 − 25 − 60 + additions = 450, so ₦135m. (2)
(b) Statement (12 marks).
- Profit before tax 160; add depreciation 60, loss on disposal 10, finance costs 20 = 250. (3)
- Inventory (20); receivables +10; payables +15.
- Cash generated from operations 255. (3)
- Interest paid (20); tax paid (45).
- Net operating 190. (1.5)
- Investing: purchase (135); proceeds 15 (25 − 10).
- Net (120). (2)
- Financing.
shares (250 + 60 − 200 − 40) 70; loans 50; dividends (160 + 110 − 230 = 40) (40). - Net 80. (2.5)
- Net increase 150; opening 30; closing 180. (1)
(c) IFRS 18 (4 marks). The start is operating profit of 180 (160 + 20). (1) The other adjustments give the same cash generated of 255. Tax paid (45) gives operating cash flow of 210. (1.5) Interest paid (20) moves to financing, so financing is 80 − 20 = 60. (1.5)
Show the model answer to Question 13
(a) Share issue (4 marks).
- (400 + 200) − (300 + 120) = 180. (2)
- Less the bonus issue 50. (1)
- Cash = ₦130. (1)
(b) Dividend (3 marks). 200 + 100 − 50 (bonus issue) − 240 = ₦10. (3)
(c) Loans (3 marks). Opening 200; closing 150. (1.5) Repayment of ₦50, a financing outflow. (1.5)
Pathfinder on Statement of cash flows
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
We found no stand-alone statement of cash flows question in the November 2025 or May 2026 Pathfinders. The topic is examinable, and worked examples 1 to 6 show the layouts and the workings.
Revise first: Worked examples
Questions reward clear workings for tax, interest, assets, shares and dividends. See the sections on investing and financing activities.
Revise first: Investing activities
Source: ICAN Pathfinder, Strategic Business Reporting. Diets covered: No stand-alone cash flow question identified in the November Diet, 2025 or May Diet, 2026 Pathfinders.
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