Accounting glossary

Cash flow statement

What a cash flow statement is, why it differs from the P&L, and the direct vs indirect method conventions across UK, AU, CA, NZ, and SG in 2026.

By ExpenseFlow team
· 18 May 2026

Definition

A cash flow statement is a financial statement reconciling the net profit from the P&L to the actual cash position on the balance sheet by splitting cash movements into operating, investing, and financing activities over a defined period. It is one of the four primary financial statements and is required for medium and large entities in every jurisdiction we cover. Modern accounting platforms generate it automatically from the underlying general ledger.

What a cash flow statement means in practice

For a bookkeeper, the cash flow statement answers a question the P&L cannot: where did the cash actually go? A business can show 100,000 of net profit on the P&L while the bank balance has declined by 30,000 over the same period, because the profit is locked up in slow-paying customer invoices, growing inventory, or capital expenditure. The cash flow statement makes that visible.

The standard structure has three sections. Cash from operating activities starts with net profit and adjusts for non-cash items (add back depreciation and amortisation) and working-capital movements (a rise in receivables reduces cash; a rise in payables increases cash; a rise in inventory reduces cash). Cash from investing activities captures fixed asset purchases and sales, business acquisitions, and investment activity. Cash from financing activities captures loan drawdowns and repayments, dividends paid, and share issues. The three sub-totals plus the opening cash balance equal the closing cash balance, which ties back to the balance sheet.

A practical example: a UK consultancy with 60,000 net profit for the year. Operating: net profit 60,000, plus 8,000 depreciation, minus 12,000 increase in AR, plus 3,000 increase in AP, minus 4,000 increase in prepayments. Operating cash 55,000. Investing: 6,000 cash spent on new laptops. Investing cash (6,000). Financing: 20,000 director loan drawdown, 12,000 dividends paid. Financing cash 8,000. Net cash movement: 55,000 minus 6,000 plus 8,000 equals 57,000. Opening cash 18,000; closing cash 75,000. The closing cash ties to the balance sheet.

How the cash flow statement works by country

United Kingdom

Required for medium and large entities under FRS 102 Section 7 (or IAS 7 for IFRS adopters). Small companies under the FRS 102 size thresholds (turnover under 10.2 million, balance-sheet total under 5.1 million, fewer than 50 employees on a two-of-three basis) are exempt from preparing a cash flow statement. Both direct and indirect methods are permitted; indirect method is the practical default in UK practice and the one Xero and QuickBooks UK produce automatically.

Australia

Required under AASB 107 Statement of Cash Flows for every reporting entity. AASB 107 expresses a preference for the direct method but the indirect method is widely used in practice. ASIC lodgement requires the cash flow statement as part of the audited annual report for non-exempt entities.

Canada

Required under ASPE Section 1540 for private companies or IAS 7 for IFRS adopters. The Canadian convention names it “Statement of Cash Flows” in published statements. Indirect method is the practical default; direct method is rare in Canadian SMB practice.

New Zealand

Required under NZ IAS 7 for Tier 1 and Tier 2 entities under the XRB framework. Tier 3 entities (simple format reporting standard) have a simplified cash receipts and payments schedule instead. Indirect method is the practical default.

Singapore

Required under SFRS(I) 7 for full-IFRS entities. Smaller companies under SFRS for Small Entities use a simplified format. Indirect method is the practical default in Singapore.

The cash flow statement is one of the four primary financial statements:

  • Statement of cash flows is the formal synonym used in CA practice.
  • The balance sheet provides the opening and closing cash positions the statement reconciles between.
  • The income statement provides the starting net profit under the indirect method.
  • Profit and loss is the everyday synonym for the income statement.
  • Net profit is the starting point of the operating section under the indirect method.
  • Working capital movements are the main non-cash adjustments in the operating section.

See also

For the practical mechanics of running a cash flow statement in Xero or QuickBooks Online, see the per-software workflow guides as they ship.

FAQ

See the answered questions above for cash flow statement vs P&L, the three sections, and direct vs indirect method.

Questions, answered

Common questions

What is the difference between a cash flow statement and a P&L?

The P&L records revenue and expenses on the accruals basis: a sale is revenue when invoiced, an expense is recognised when incurred. The cash flow statement records actual cash movements: a sale is cash when paid, an expense is cash when paid. A business can be profitable on the P&L while running out of cash on the cash flow statement if customers pay slowly.

What are the three sections of a cash flow statement?

Operating activities (cash from running the core business: customer receipts, supplier payments, payroll, tax), investing activities (cash from buying or selling long-term assets: equipment purchases, business acquisitions, investment sales), and financing activities (cash from raising or repaying capital: loan drawdowns, loan repayments, dividends paid, share issues).

What is the difference between direct and indirect method?

Direct method lists actual cash inflows and outflows (cash from customers, cash paid to suppliers, cash paid to employees). Indirect method starts with net profit and adjusts for non-cash items (depreciation, working-capital movements) to arrive at operating cash. Indirect is the practical default in every major standard because it is easier to derive from existing accounting records.

Keep exploring

Statement of cash flows

The formal name in IFRS and the Canadian ASPE framework for the financial statement that reconciles net profit to actual cash movements, spl

Balance sheet

A financial statement presenting a snapshot of what a business owns (assets), what it owes (liabilities), and the residual interest of its o

Income statement

A financial statement summarising revenue, costs of sales, gross profit, operating expenses, and net profit (or loss) over a defined account

Profit and loss (P&L)

A financial statement summarising revenue, expenses, and the resulting profit or loss over a defined period, identical in substance to the i

Net profit

The bottom line of the income statement: revenue minus cost of sales minus operating expenses minus interest minus tax, representing the res

Working capital

The difference between current assets and current liabilities on the balance sheet, representing the short-term operating liquidity of the b

Track cash flow statement without spreadsheets

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