# How to Prepare a Cash Flow Statement > Learn how to prepare a cash flow statement using the indirect method. IAS 7 rules, worked examples with SAR amounts, and common mistakes to avoid. - Canonical page: https://accountery.app/learn/how-to-prepare-cash-flow-statement - Language: English (en) - Category: financial-statements - Estimated reading time: 13 minutes - Published: 2026-04-11 - Updated: 2026-04-11 ## What Is a Cash Flow Statement and Why It Matters Profit and cash are not the same thing. A company can show SAR 2 million in profit on its income statement and still run out of cash to pay salaries next month. That's the reason **how to prepare a cash flow statement** is one of the most important skills in accounting — it tells you where cash actually came from and where it actually went. The **cash flow statement** tracks every SAR that entered or left the business during a period. It bridges the gap between accrual-based profit (what you earned) and the cash in your bank account (what you actually have). Under **IAS 7 — Statement of Cash Flows**, every entity reporting under IFRS must prepare one alongside the balance sheet and income statement. It's the third core financial statement, and without it you only see half the picture. ## The Three Sections You Need to Know IAS 7 classifies every cash movement into one of three categories: - **Operating activities** — cash generated by the core business: receipts from customers, payments to suppliers, salaries, tax payments. This is the heart of the business. - **Investing activities** — cash spent or received on long-term assets: buying equipment, selling a vehicle, acquiring a subsidiary. - **Financing activities** — cash movements with owners and lenders: issuing shares, taking loans, repaying debt, paying dividends. The total of all three sections equals the change in cash and cash equivalents for the period. If your opening cash was SAR 100,000 and your closing cash is SAR 150,000, the three sections must add up to SAR 50,000. | Section | Example Inflow | Example Outflow | |---|---|---| | Operating | Customer payment | Salary payment | | Investing | Sale of equipment | Purchase of land | | Financing | New loan received | Dividend paid | ## Direct vs Indirect Method: Which Should You Use? For operating activities, IAS 7 allows two methods: - **Direct method** — list actual cash receipts and payments line by line (cash from customers, cash paid to suppliers, etc.) - **Indirect method** — start with net profit and adjust for non-cash items and working capital changes IAS 7 **encourages** the direct method because it's more informative. But in practice, over 95% of companies use the **indirect method** because the data is easier to pull from existing accounting records. You already have net profit and balance sheet movements — you don't need to re-categorize every transaction. For this guide, we'll focus on the indirect method. It's what you'll see in most real-world financial statements and what exams typically test. ## The Indirect Method: Step by Step The indirect method starts with **net profit** and works backwards to cash generated from operations. Here's the logic: 1. Start with net profit 2. Add back non-cash expenses (depreciation, amortization, impairment) 3. Adjust for gains or losses on investing/financing items 4. Adjust for changes in working capital (receivables, inventory, payables) **Worked Example — Al-Manara Trading Co.** Al-Manara reported net profit of SAR 500,000 for 2026. During the year: - Depreciation was SAR 120,000 - Trade receivables **increased** by SAR 80,000 - Inventory **decreased** by SAR 30,000 - Trade payables **increased** by SAR 45,000 | Item | SAR | |---|---| | Net profit | 500,000 | | Add: Depreciation | 120,000 | | Less: Increase in receivables | (80,000) | | Add: Decrease in inventory | 30,000 | | Add: Increase in payables | 45,000 | | **Cash from operating activities** | **615,000** | **The logic:** An **increase in receivables** means customers owe more — that sale is profit but not yet cash. A **decrease in inventory** means you sold stock without replacing it — that's cash you didn't spend. An **increase in payables** means you kept cash that you'd normally have paid to suppliers. ## Investing Activities: Capital Expenditure and Asset Sales Investing activities cover all cash movements related to long-term assets and investments. The two most common lines: - **Purchase of property, plant and equipment (PPE)** — cash paid for new assets, shown as a negative - **Proceeds from sale of PPE** — cash received when you dispose of an asset, shown as a positive **Worked Example:** In 2026, Al-Manara bought new delivery trucks for SAR 300,000 and sold old office equipment for SAR 25,000. | Investing Activities | SAR | |---|---| | Purchase of equipment | (300,000) | | Proceeds from sale of equipment | 25,000 | | **Cash used in investing activities** | **(275,000)** | One important note: you record the **cash** paid or received, not the accounting value. If the old equipment had a carrying amount of SAR 20,000 and you sold it for SAR 25,000, the SAR 5,000 gain goes through the income statement — but in the cash flow statement you only show the SAR 25,000 cash received. ## Financing Activities: Loans, Equity, and Dividends Financing activities cover cash movements between the business and its sources of capital — banks and owners. Typical items: - **Proceeds from new loans** — positive - **Repayment of loans** — negative - **Issue of share capital** — positive - **Dividends paid** — negative **Worked Example:** In 2026, Al-Manara took a new SAR 200,000 bank loan, repaid SAR 50,000 on an old loan, and paid SAR 100,000 in dividends to shareholders. | Financing Activities | SAR | |---|---| | Proceeds from new loan | 200,000 | | Repayment of loan | (50,000) | | Dividends paid | (100,000) | | **Cash from financing activities** | **50,000** | **Putting it all together** — Al-Manara's total change in cash: | | SAR | |---|---| | Cash from operating | 615,000 | | Cash from investing | (275,000) | | Cash from financing | 50,000 | | **Net change in cash** | **390,000** | If Al-Manara started the year with SAR 250,000 in cash, they'll end with SAR 640,000. ## Common Mistakes When Preparing Cash Flow Statements - **Forgetting to add back non-cash items**: Depreciation and amortization aren't cash payments — they must be added back to net profit under the indirect method - **Getting working capital signs backwards**: An **increase** in receivables is a cash **outflow** (cash is tied up), and an **increase** in payables is a cash **inflow** (you deferred payment). Mix these up and your totals won't reconcile. - **Mixing gross and net amounts**: Don't net a new loan against a repayment — show them separately. IAS 7 requires gross reporting for most items. - **Classifying interest and dividends wrong**: Under IFRS, interest paid can go in operating OR financing (pick one and be consistent). Dividends paid usually go in financing. Whatever choice you make, apply it every year. - **Ignoring the cash reconciliation**: The three sections must add up to the actual change in cash shown on the balance sheet. If they don't, something is wrong — usually a missing adjustment. - **Treating non-cash transactions as cash flows**: Issuing shares to acquire a building is a non-cash transaction — it goes in the notes, not in the cash flow statement. ## Put It Into Practice Knowing the theory is one thing. Actually building a cash flow statement from a trial balance and a set of transactions is where it clicks. On Accountery, you can practice cash flow statement preparation in worksheet exercises — work from real opening and closing balance sheets, identify non-cash items, and calculate the three sections. Each attempt gives you instant feedback on where your signs or classifications went wrong, so you learn the pattern faster than any textbook can teach it. --- Educational content from Accountery. Verify current standards, regulations, and authoritative sources before professional use.