This free, guided checker walks your finance team through the key decision points for IAS 7 Statement of Cash Flows Direct Method. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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IAS 7.18 lets an entity report operating cash flows using either the direct or the indirect method, and IAS 7.19 encourages the direct method. Run the test by asking whether the ledger can produce gross receipts and payments by major class; if it can only reconcile from profit or loss, the indirect method is being used. The common trap is labelling an indirect reconciliation as direct because a few gross lines were added.
Present operating cash flows using the indirect method, adjusting profit or loss for non-cash items and working-capital changes (IAS 7.18(b); IAS 7.20).
Official guidance: IFRS issued standards
IAS 7.18(a) and 7.19(a) require gross cash collected from customers for goods and services to be presented as a major class. Run the test by mapping each revenue stream to its collection pattern in the receivables ledger and agreeing the total to bank deposits and the movement in trade receivables and contract liabilities. The common trap is netting collections against related refunds or supplier payments, which IAS 7.21 prohibits.
Map customer cash receipts by major revenue stream from the receivables ledger before presenting the direct method operating section (IAS 7.19(a)).
Official guidance: IFRS issued standards
IAS 7.19(b)-(c) require gross payments to suppliers for inventory and services and gross payments to and on behalf of employees to be shown as separate major classes. Test by tracing accounts payable and payroll disbursements to the bank and confirming they are not collapsed into a single operating line. The common misapplication is presenting one net operating-payments figure rather than distinct supplier and employee classes.
Separate gross payments to suppliers and to employees as distinct major classes in the cash-flow mapping (IAS 7.19(b)-(c)).
Official guidance: IFRS issued standards
IAS 7.35 requires cash income taxes to be disclosed separately and classified as operating unless a specific tax cash flow can be identified with a financing or investing activity (IAS 7.36). Run the test by extracting instalments, balancing payments, and refunds from the tax payment records and reconciling them to the current tax liability rollforward. The common trap is leaving tax payments buried inside other operating outflows rather than presenting them as a single major class.
Present income taxes paid as a separate major class of operating cash flow (IAS 7.35).
Official guidance: IFRS issued standards
IAS 7.31 to 7.34 permit interest and dividends paid and received to be classified as operating, investing, or financing, provided the choice is applied consistently and disclosed. Test consistency by comparing this period's classification with the disclosed policy and the prior year. The common misapplication is splitting interest paid between periods or against the policy simply to smooth an operating subtotal.
Reclassify interest and dividend cash flows to the entity's disclosed and consistently applied policy (IAS 7.31; IAS 7.33).
Official guidance: IFRS issued standards
IAS 7.16 defines investing activities as the acquisition and disposal of long-term assets and other investments not held as cash equivalents, presented gross by major class (IAS 7.21). Test by mapping capital expenditure, asset disposals, and investment purchases and sales from the fixed asset and investment ledgers to bank records. The common trap is netting disposal proceeds against purchases instead of presenting gross inflows and outflows.
Map investing cash flows into gross major classes by asset and investment type (IAS 7.16; IAS 7.21).
Official guidance: IFRS issued standards
IAS 7.17 defines financing activities as proceeds and repayments of borrowings and lease liabilities and transactions with owners, presented gross by major class (IAS 7.21). Run the test by mapping drawdowns, repayments, lease principal, and equity transactions from the treasury, lease, and equity ledgers, and prepare the IAS 7.44A reconciliation of liabilities arising from financing activities. The common trap is netting borrowing drawdowns against repayments rather than presenting them separately.
Map financing cash flows into gross major classes by debt instrument and equity transaction (IAS 7.17; IAS 7.21).
Official guidance: IFRS issued standards
IAS 7.43 requires investing and financing transactions that do not use cash, such as assets acquired by assuming liabilities, by lease, or by issuing equity, to be excluded from the statement and disclosed elsewhere (IAS 7.44). Test by scanning additions financed by debt or leases and any debt-to-equity conversions during the period. The common trap is leaving a lease-financed asset addition inside the investing and financing sections instead of disclosing it separately.
Disclose material non-cash investing and financing transactions in the notes (IAS 7.43).
Official guidance: IFRS issued standards
IAS 7.25 to 7.27 require each foreign currency cash flow to be translated at the exchange rate at the date of the cash flow, or a rate that approximates it, and IAS 7.28 requires the effect of rate changes on cash held to be presented separately. Run the test by confirming the rate source dates match the cash-flow dates and that unrealised exchange differences are excluded from the three activity sections. The common trap is applying a period-average or closing rate and treating unrealised FX as if it were a cash flow.
Translate foreign currency cash flows at the exchange rate on the date of each cash flow and present the effect of rate changes separately (IAS 7.25; IAS 7.28).
Official guidance: IFRS issued standards
IAS 7.45 requires the components of cash and cash equivalents to be disclosed and reconciled to the equivalent line items in the statement of financial position. Run the test by listing each bank balance, short-term deposit, and qualifying instrument, confirming it meets the IAS 7.6 to 7.7 definition, and agreeing the total to the balance sheet. The common trap is including an instrument that is not short-term or is subject to significant risk of change in value, or omitting an overdraft that forms part of cash management (IAS 7.8).
Disclose the components of cash and cash equivalents and reconcile them to the statement of financial position (IAS 7.45).
Official guidance: IFRS issued standards
Net cash from operating, investing, and financing activities must equal the change in cash and cash equivalents and reconcile to opening and closing balances (IAS 7.10; IAS 7.45). Run the test by agreeing each major class to the general ledger and confirming the three subtotals sum to the movement in the cash lines on the balance sheet. The common trap is a statement that foots internally but does not tie to the ledger because a reclassification or FX effect was omitted.
Direct method statement of cash flows is complete with major classes disclosed and reconciled to the ledger (IAS 7.10; IAS 7.45). Complete the general ledger tie-out and net cash reconciliation before issuance (IAS 7.10; IAS 7.45).
Official guidance: IFRS issued standards
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