Cash Flow Statements: A Complete A Level Accounting Guide (IAS 7)
Sir Shehroz Iqbal
21 June 2026 · 8 min read
The cash flow statement is consistently the lowest-scoring topic in CAIE Accounting 9706 A2 Level exams. It is also one of the most valuable skills in real-world accounting — every chartered accountant, financial analyst, and auditor works with cash flow statements regularly.
This guide explains the IAS 7 indirect method step by step, with exam techniques to help you score where others struggle.
Why Cash Flow Differs From Profit
A business can report strong profits but run out of cash. This happens because:
• Revenue is recognised when earned, not when cash is received. • Depreciation reduces profit but involves no cash outflow. • Purchasing non-current assets uses cash but does not appear in the income statement. • Loan repayments use cash but only the interest appears in the income statement.
The cash flow statement reconciles profit to actual cash movements, classified into three activities.
The Three Sections (IAS 7)
1. Operating activities — cash generated from day-to-day business operations. 2. Investing activities — cash used for or received from the purchase/sale of non-current assets and investments. 3. Financing activities — cash from or to providers of capital (share issues, loan receipts, dividend payments, loan repayments).
The net change in cash across all three sections, plus the opening cash balance, equals the closing cash balance.
Operating Activities: The Indirect Method
CAIE Accounting 9706 uses the indirect method. Start with operating profit and adjust:
Adjustment — Effect on Cash · Add: Depreciation — Increases (non-cash expense added back) · Add: Loss on disposal of non-current assets — Increases · Less: Profit on disposal of non-current assets — Decreases · Less: Increase in trade receivables — Decreases (more cash tied up) · Add: Decrease in trade receivables — Increases · Less: Increase in inventory — Decreases · Add: Decrease in inventory — Increases · Add: Increase in trade payables — Increases (delayed cash outflow) · Less: Decrease in trade payables — Decreases
Memory aid: An increase in a current asset uses cash (subtract). An increase in a current liability preserves cash (add). Reverse for decreases.
Investing Activities
Item — Cash Flow Direction · Purchase of non-current assets — Outflow · Proceeds from sale of non-current assets — Inflow · Purchase of investments — Outflow · Proceeds from sale of investments — Inflow · Interest received — Inflow (may be operating under IAS 7 — CAIE typically places it here)
Use the non-current asset schedule (t-account) to find purchases and disposals if not stated directly.
Financing Activities
Item — Cash Flow Direction · Proceeds from issue of shares — Inflow · Proceeds from long-term loans — Inflow · Repayment of long-term loans — Outflow · Dividends paid — Outflow · Interest paid — Outflow (may be operating — check the question)
Worked Approach for Exam Questions
1. Open with operating profit from the income statement. 2. Add back depreciation and any other non-cash expenses. 3. Adjust for profit/loss on disposal — add back losses, subtract profits. 4. Calculate working capital changes using opening and closing balances from the statements of financial position. 5. Sum to net cash from operating activities. 6. List investing items with purchases as outflows and proceeds as inflows. 7. List financing items similarly. 8. Calculate net change in cash and reconcile to opening and closing cash balances.
Common Cash Flow Mistakes
• Including depreciation as a cash outflow in investing activities (it is a non-cash add-back in operating). • Forgetting to adjust for changes in working capital. • Treating the purchase of a non-current asset as an operating outflow. • Not reconciling the final cash balance to the balance sheet. • Arithmetic errors in the working capital adjustments section.
Practise Recommendations
Complete at least 6 cash flow questions from A2 past papers under timed conditions (25–30 minutes each). Verify your closing cash balance matches the statement of financial position after every attempt.
