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IAS 7

Statement of Cash Flows

IAS 7 governs how an entity presents changes in its cash and cash equivalents over a reporting period, splitting cash movements into operating, investing and financing activities so that users can assess an entity's ability to generate cash and how that cash is used. [S1]

Effective 1992-01-01Related: IAS 1 · IAS 8 · IAS 12 · IAS 21 · IFRS 16

Overview

IAS 7 requires a statement of cash flows as a primary statement, reconciling the opening and closing balances of cash and cash equivalents through three activity headings: operating (the cash effects of the entity's core revenue-generating activities), investing (acquisition and disposal of long-term assets and other investments), and financing (transactions that change the size and composition of equity and borrowings). [S1] An entity may present operating cash flows using the direct method (gross receipts and payments) or the indirect method (profit or loss adjusted for non-cash items and working-capital movements); the indirect method is used by most preparers because it builds directly from the trial balance. [S2]

Why it matters

Profit is an accrual number; it can be positive while an entity is cash-starved, or negative while cash generation is strong. Lenders, boards and financiers look closely at operating cash flow as a test of repayment capacity and of the quality of reported earnings, since cash is harder to manipulate than accruals.

Scope

IAS 7 applies to all entities preparing IFRS financial statements, including banks and similar financial institutions, subject to specific guidance for those sectors. It defines cash as cash on hand and demand deposits, and cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value — in practice, instruments with an original maturity of three months or less. [S1]

Key definitions

term
Cash
definition
Cash on hand and demand deposits.
term
Cash equivalents
definition
Short-term, highly liquid investments readily convertible to known amounts of cash, subject to insignificant risk of value change (commonly original maturity ≤ 3 months).
term
Operating activities
definition
The principal revenue-producing activities of the entity and other activities that are not investing or financing.
term
Investing activities
definition
Acquisition and disposal of long-term assets and other investments not included in cash equivalents.
term
Financing activities
definition
Activities that change the size and composition of the contributed equity and borrowings of the entity.

Recognition

A cash flow is recognised in the statement of cash flows in the period the cash or cash equivalent movement actually occurs; classification (not recognition timing) is the main judgement area — an item is allocated to the activity heading that best reflects the nature of the underlying transaction, applied consistently period to period.

Initial measurement

Cash flows are measured at the actual amount of cash or cash equivalents paid or received. Foreign-currency cash flows are translated at the exchange rate at the date of the cash flow (or a rate that approximates it); unrealised gains or losses on retranslating cash and cash equivalents held in foreign currency are presented separately from operating, investing and financing cash flows and reconciled into the movement for the period.

Subsequent measurement

There is no subsequent remeasurement of historical cash flows themselves; what continues each period is the reconciliation of cash and cash equivalents on the statement of cash flows to the equivalent line(s) in the statement of financial position, and a reconciliation of liabilities arising from financing activities showing both cash and non-cash movements (for example new borrowings drawn, principal repaid, and the effect of foreign exchange). [S1][S2]

Presentation

Operating cash flows: direct method (encouraged, rarely used in practice because of the data burden) or indirect method (profit or loss adjusted for depreciation, amortisation, impairment, working-capital movements, and items relocated to investing/financing). Interest and dividends paid and received, and taxes paid, must each be disclosed separately and classified consistently — IAS 7 permits more than one acceptable classification for interest and dividends (e.g. interest paid may be operating or financing; dividends received may be operating or investing), so the chosen policy should be disclosed and applied consistently. [S1][S3][S4] Cash flows are reported gross except for a limited set of items (e.g. cash collected/paid on behalf of customers, or items with fast turnover and large amounts), which may be reported net.

Disclosure checklist

  • Components of cash and cash equivalents and the policy for determining them.
  • Reconciliation of amounts in the statement of cash flows to the equivalent items in the statement of financial position.
  • Amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group (restricted cash), with commentary.
  • Disclosure of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments.
  • Non-cash investing and financing transactions excluded from the statement but disclosed elsewhere (e.g. asset acquired via a lease, debt converted to equity, PPE acquired through a share exchange).
  • Reconciliation of liabilities arising from financing activities (opening balance, cash flows, non-cash changes such as FX or fair value, closing balance).
  • Classification policy for interest paid/received, dividends paid/received and taxes paid.
  • Cash flows from operating, investing and financing activities of discontinued operations and business combinations, where material.

Practical treatment

Recurring practical issues: (1) bank overdrafts — where an overdraft is repayable on demand and forms an integral part of an entity's cash management, it is included as a component of cash and cash equivalents; a term overdraft used as financing is instead treated as a financing liability. (2) Restricted cash — balances held under central bank reserve requirements, escrow arrangements, or cash pledged as collateral are not freely available and should be identified and explained even though they may still meet the definition of cash. (3) Foreign-currency cash balances — FX retranslation of such balances must be shown separately, not embedded in operating cash flow. (4) Withholding tax and levies deducted at source on customer receipts should not distort the operating cash flow presentation — gross receipts and related tax cash flows are usually best shown separately for clarity. See nigeria_notes for jurisdiction-specific detail.

Common mistakes

  • Presenting bank overdrafts used as short-term financing as a negative cash balance instead of a financing liability.
  • Omitting the non-cash transactions note (e.g. an asset bought entirely through a loan drawdown, or a right-of-use asset recognised on initial application of IFRS 16) because 'no cash moved'.
  • Inconsistent classification of interest paid between operating and financing from one year to the next without disclosure of the policy or a change explanation.
  • Failing to reconcile the cash and cash equivalents total on the face of the statement to the statement of financial position, especially where restricted cash is presented separately on the balance sheet.
  • Netting-off financing cash inflows and outflows (e.g. loan drawn and loan repaid) that should be presented gross.
  • Not preparing the financing-liabilities roll-forward disclosure.

CFO checklist

  • Confirm the classification policy for interest and dividends (paid and received) is documented and applied consistently year over year.
  • Identify and separately disclose any restricted or encumbered cash.
  • Prepare the financing-liabilities reconciliation (opening balance to closing balance, splitting cash and non-cash movements) before the audit file is closed.
  • Cross-check the closing cash and cash equivalents figure to the statement of financial position and bank confirmations.
  • Scan the year's transactions for non-cash investing/financing items that need a note disclosure (leases, debt-for-equity swaps, asset-for-asset exchanges).
  • Confirm FX gains/losses on foreign-currency cash balances are shown as a separate reconciling line, not embedded in operating cash flow.

FAQs

q
Is VAT collected from customers and remitted to the tax authority shown in the cash flow statement?
a
Yes, as part of operating cash flows, since VAT collected and remitted is not the entity's own revenue or expense but does pass through its bank account; many preparers show it net within operating cash flow given its transitory, agency nature.
q
Do dividends paid have to be classified as a financing cash flow?
a
IAS 7 requires separate disclosure of dividends paid, but permits classification as either a financing activity (common, since dividends are a cost of obtaining equity finance) or, less commonly, an operating activity; the policy must be applied consistently. [S1]
q
How should an intercompany loan from a subsidiary to its foreign parent be classified?
a
As an investing activity from the lender's perspective (it is an investment in another entity) and a financing activity from the borrower's perspective, mirroring the substance of the transaction on each side.

Nigeria application notes

Regulatory overlay

IFRS Accounting Standards, including IAS 7, apply to Nigerian public interest entities under the mandate of the Financial Reporting Council of Nigeria Act 2011, which requires FRCN to promote compliance with IASB-adopted standards; Nigeria's IFRS adoption effective date was 1 January 2012, phased by entity type. [S5]

Tax interaction (Nigeria)

Income tax paid is disclosed separately within operating cash flows; the mechanics of tax remittance to the Nigeria Revenue Service (NRS, successor to the FIRS under the tax reform Acts effective 1 January 2026) and the VAT collection/remittance cycle at the current 7.5% standard rate do not themselves change IAS 7's classification principles, but preparers should reassess the operating classification of tax-related cash flows for consistency each time administration mechanics change. [S_TAX1][S_TAX2][S_TAX3]

FX considerations

Entities holding naira alongside foreign-currency cash balances (common for import-dependent or dollar-invoiced businesses) must show FX retranslation of cash and cash equivalents as a separate reconciling line, distinct from operating, investing and financing cash flows. Cash held under Central Bank of Nigeria cash reserve requirements (45% for deposit money banks as at the CBN's most recent published monetary policy decision) is a regulatory constraint on banks' own liquidity and, where relevant to a banking-sector client, should be considered when assessing what portion of cash is genuinely available for use. [S6]

SME practical note

Most Nigerian SME engagements use the indirect method built from the trial balance; the recurring build issue is that overdraft facilities with Nigerian deposit money banks fluctuate between debit and credit through the year and are frequently misclassified as term financing rather than as a cash equivalent, which distorts both the operating and financing sections.

Common Nigerian pitfalls

  • Classifying a revolving, on-demand bank overdraft as financing rather than as a component of cash and cash equivalents.
  • Failing to separately identify cash restricted under escrow, project-finance, or letter-of-credit collateral arrangements.
  • Embedding naira/foreign-currency FX retranslation of cash balances inside operating cash flow instead of showing it as a separate reconciling item.
  • Not reassessing the tax-cash-flow classification policy when NRS/FIRS administrative mechanics or effective dates change.

FRC pronouncements

FRCN has not issued a cash-flow-specific pronouncement beyond the general IFRS adoption mandate; entities should rely on IAS 7 itself and FRCN's general supervisory guidance rather than a standard-specific FRCN circular, since none has been identified for this file. [S5]

Worked examples

Indirect method reconciliation with a non-cash lease addition

A Nigerian distribution company reports profit before tax of ₦45,000,000 for the year. Depreciation charged was ₦8,000,000, trade receivables increased by ₦3,500,000, trade payables increased by ₦2,000,000, and the company recognised a new right-of-use asset and lease liability of ₦12,000,000 on signing a warehouse lease (a non-cash transaction). Income tax paid in cash during the year was ₦9,000,000.

Facts

Workings

Profit before tax: 45,000,000

Add back depreciation (non-cash): +8,000,000

Increase in receivables (cash used): -3,500,000

Increase in payables (cash generated): +2,000,000

Cash generated from operations: 51,500,000

Less income tax paid: -9,000,000

Net cash from operating activities: 42,500,000

Journal entries

Recognise right-of-use asset and corresponding lease liability on lease commencement (non-cash transaction; excluded from the statement of cash flows and disclosed separately as a non-cash investing and financing transaction).

AccountDr (₦)Cr (₦)
Right-of-use asset12,000,000
Lease liability12,000,000

Classifying an overdraft used for working capital

A trading company's bank account fluctuates between a ₦2,000,000 credit balance and a ₦1,500,000 overdraft during the year as part of routine cash management, with no fixed repayment schedule and the facility repayable on demand.

Facts

Workings

Because the facility is repayable on demand and forms an integral part of cash management, the overdraft balance is included as a component of cash and cash equivalents (a negative cash equivalent), not shown as a financing cash flow.

Journal entries

Reclassify closing overdraft as a component of cash and cash equivalents for cash flow statement purposes.

AccountDr (₦)Cr (₦)
Cash and cash equivalents (control account)1,500,000
Bank overdraft (within cash and cash equivalents)1,500,000

Sources & citations

  1. [S1]IAS 7 Statement of Cash Flows — IFRS Foundationaccessed 2026-07-18
  2. [S2]IAS 7 — Statement of Cash Flows (standard summary) — IAS Plus, Deloitteaccessed 2026-07-18
  3. [S3]Statement of Cash Flows (IAS 7) — IFRS Communityaccessed 2026-07-18
  4. [S4]IAS 7 Statement of cash flows — IFRS in Brief — Moore Globalaccessed 2026-07-18
  5. [S5]IFRS - Use of IFRS Standards by jurisdiction: Nigeria — IFRS Foundationaccessed 2026-07-18
  6. [S6]Monetary Policy Decisions (Cash Reserve Ratio) — Central Bank of Nigeriaaccessed 2026-07-18
  7. [S_TAX1]Nigeria Tax Act, 2025 has been signed – highlights — EY Globalaccessed 2026-07-18
  8. [S_TAX2]Nigeria - New Legislation Includes Important Changes to VAT Rules — BDO Globalaccessed 2026-07-18
  9. [S_TAX3]The Nigerian Tax Reform Acts — PwC Nigeriaaccessed 2026-07-18
Last reviewed 2026-07-18 · Reviewer: Rafiu Olawuyi (FCA — Author / Technical Reviewer)