Statements of Cash Flows (Indirect method only), ACCA Financial Accounting (FA/F3)

Statement of Cash Flows ACCA is a very important part of financial accounting. It explains how cash enters a business and how it goes out during a period. Unlike the Profit and Loss account, which records profits, this statement focuses only on actual cash.

For students preparing for the ACCA FA/F3 exam, the indirect method is the most relevant. This method is often tested, and it requires a clear understanding of non-cash adjustments and changes in working capital. When students learn the indirect method properly, they can attempt exam questions with confidence.

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What is the Statement of Cash Flows?

The Statement of Cash Flows ACCA is one of the main financial statements, along with the Profit and Loss account and the Balance Sheet. It does not show how much profit a business earns, but shows how much cash is generated and used. This statement is divided into three parts:

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In the ACCA FA/F3 exam, the main focus is on operating activities. Students must learn how to prepare operating cash flows using the indirect method. This makes it easier to connect profit figures with real cash movements.

Indirect Method in Statement of Cash Flows

The indirect method is the approach used in the Statement of Cash Flows ACCA, to calculate net cash from operating activities. Instead of listing every cash receipt and cash payment, we start with profit before tax and then make adjustments.

The adjustments include adding back non-cash expenses, removing non-operating gains, and making changes for working capital. This is why the Indirect method cash flow ACCA exam is considered practical. Students can prepare it directly from the Profit and Loss account and Balance Sheet without tracking every cash transaction.

Important Adjustments in Statement of Cash Flows

Before learning the process, students must understand the key adjustments. These adjustments ensure that profit is converted into real cash figures. In the Statement of Cash Flows ACCA, these adjustments play the biggest role in exam questions.

These adjustments are linked with Operating activities cash flows (non-cash adjustments) and Working capital changes in cash flow statements, which are critical for students to understand.

Step-by-Step Process of the Indirect Method of Cash

Below, we’ve mentioned a simple process to prepare the Statement of Cash Flows ACCA using the indirect method:

Step 1: Start with profit before tax.

Step 2: Add back non-cash expenses like depreciation and amortisation.

Step 5: Subtract any non-operating income, like profit on the sale of assets.

Step 6: Add back non-operating losses like loss on sale of assets.

Step 7: Adjust for working capital changes in cash flow statements:

• Increase in inventory and receivables = subtract
• Decrease in inventory and receivables = add
• Increase in payables = add
• Decrease in payables = subtract

Step 8: Subtract interest paid (if required by exam format).

Step 9: Subtract tax paid.

Step 10: The final figure is net cash from operating activities.

Tips to Approach Indirect Method Questions in ACCA FA/ F3

Students sometimes feel that the indirect method is difficult. But if they follow a systematic approach, the Statement of Cash Flows ACCA becomes much easier to handle in the exam.

Common Students' Mistakes in the Indirect Method Cash Flow

Even when students know the format, they make mistakes. Below, we’ve mentioned some common errors in Statement of Cash Flows ACCA exams:

Forgetting non-cash adjustments: Many students forget to add back depreciation or amortisation. This leads to wrong answers.

Confusing profit and cash: Profit does not equal cash. Students often forget that cash flow focuses on liquid money, not accounting profit.

Incorrect working capital adjustments: Increases and decreases in inventory, receivables, and payables are often treated the wrong way. Understanding working capital changes in cash flow statements is vital.

Wrong treatment of asset sales: Profits and losses from the sale of assets should be adjusted. But many students either ignore them or put them in the wrong section.

Not following the right order: The steps of the Indirect method cash flow ACCA exam must be followed in sequence. Otherwise, errors occur in the final figure.