Indirect cash flow: remove noncash changes before using balance movements
A £6,000 increase in supplier payables does not automatically add £6,000 to operating cash. Part may relate to equipment bought without a cash payment. Inventory movements need similar care when a write-down has already reduced the closing balance. An indirect cash-flow worksheet must separate those effects before using balance changes.
Analyse what moved each balance
IAS 7 paragraphs 18(b) and 20 describe the indirect method: adjust profit or loss for noncash items, operating accruals and deferrals, and income or expenses associated with investing or financing cash flows. A balance-sheet movement is evidence for the reconciliation, not automatically a cash-flow amount.
This guide applies UK-adopted full IFRS for a 2026 annual period, without early adoption of IFRS 18. The example is an operating cash bridge for an ordinary trading business, not a complete cash-flow statement. There are no acquisitions, foreign exchange effects, tax, interest, prepayments, payroll accruals, credit losses or other unstated movements.
A stock write-down illustrates the problem. It reduces profit and closing inventory without itself using cash. If the worksheet adds back that expense separately, it must also remove the write-down's effect from the inventory movement. Otherwise it counts the same adjustment twice.
An equipment creditor needs a different separation. IAS 7 paragraph 16(a) classifies cash payments to acquire equipment as investing. Paragraphs 43 and 44 exclude noncash investing and financing transactions from the cash-flow statement and require relevant information elsewhere. Buying equipment on credit does not create an operating cash inflow.
Build the operating reconciliation
All amounts below are hypothetical pounds and exclude taxes. Revenue is £200,000, all on credit. Trade receivables rise from £30,000 to £42,000, with no other changes, so cash collections are £188,000.
Inventory opens at £20,000. Add purchases of £95,000, deduct £80,000 of stock sold and a £5,000 write-down to reach closing inventory of £30,000. Payroll expense and cash paid are both £55,000. Depreciation is £10,000. Profit is £200,000 − £80,000 − £5,000 − £55,000 − £10,000 = £50,000.
Total supplier payables rise from £25,000 to £31,000. The £6,000 increase includes a new £4,000 equipment creditor. There is no equipment cash payment. Operating inventory payables therefore rise by only £2,000.
The reported inventory increase is £10,000, after the £5,000 noncash write-down. Before that write-down, the increase is £15,000. Use that adjusted increase if the worksheet adds the write-down back separately.
| Operating cash bridge | Adjustment or total |
|---|---|
| Profit | £50,000 |
| Add depreciation | £10,000 |
| Add inventory write-down | £5,000 |
| Less inventory increase before write-down | −£15,000 |
| Less trade receivable increase | −£12,000 |
| Add operating inventory-payable increase | £2,000 |
| Net operating cash | £40,000 |
Sources and context, checked :
Check the answer against cash receipts and payments
Inventory supplier payments are £95,000 of purchases less the £2,000 operating payable increase, or £93,000. Cash collections of £188,000 less £93,000 paid to inventory suppliers and £55,000 paid for payroll equal £40,000. That independently reproduces the bridge.
There is another consistent way to handle the write-down. Leave it in profit and deduct only the net £10,000 inventory increase. The bridge becomes £50,000 + £10,000 depreciation − £10,000 inventory increase − £12,000 receivable increase + £2,000 operating payable increase = £40,000.
The error is to add back £5,000 while deducting only the net £10,000 stock increase. Using the whole £6,000 supplier-payable increase compounds it. That worksheet would report £49,000: £50,000 + £10,000 + £5,000 − £10,000 − £12,000 + £6,000. The £9,000 overstatement comprises £5,000 of double-counted write-down and the £4,000 equipment creditor.
The equipment entry is Dr property, plant and equipment £4,000; Cr equipment payable £4,000. There is no cash movement at that point. Cash-flow worksheet adjustments are not automatic ledger journals, so do not post them again into the accounts.
Keep a movement schedule behind every working-capital line
For each balance, reconcile opening amount, operating activity, relevant cash movement and noncash changes to the closing amount. Separate asset creditors from operating payables. An increase in operating payables reflects less cash paid than the related purchases or expenses under these facts, rather than cash received.
A final tie to the bank balance is useful, but cannot by itself prove that operating and investing classifications are correct. The reconstructed collections and payments provide an additional check on this operating bridge.
IFRS 18 is effective for annual periods beginning on or after 1 January 2027, with early application permitted. The example assumes it has not been adopted early. Keep the applicable reporting period and presentation requirements clear when reusing the worksheet; a correct working-capital analysis still needs the correct starting subtotal for that framework.
Sources and context, checked :