Your accounts show a profit of AED 100,000. You check the bank account, and the increase in cash is much smaller.
Before assuming something is wrong, look at what happened during the period. Customers may still owe you money. You may have bought inventory that remains on the shelves, or paid for equipment that will serve the business for several years.
A cash flow statement helps explain those movements.
Under the indirect method, you start with a profit figure and adjust it for non-cash items, movements in operating balances and items whose cash effects belong elsewhere in the statement. The result shows how much cash the business generated or used through its operations.
This guide walks through a simplified AED example for a UAE business. If your records need reconciling before you can prepare the statement, A&A Associate's accounting services in Dubai can help you assess the accounting and reporting work required.
What does the indirect method explain?
A profit report records income and expenses under the accounting basis your business uses. Cash receipts and payments can happen at different times.
Consider a customer invoice for AED 30,000. Your business may have recognised the revenue because it completed the work, even though the customer has not paid. That revenue can contribute to profit without increasing cash during the same period.
Depreciation creates a different adjustment. It reduces accounting profit, but the depreciation entry itself does not involve a cash payment.
The indirect method reconciles these differences. IAS 7 describes adjustments for non-cash transactions, accruals and deferrals, and income or expenses associated with investing or financing cash flows. IFRS Foundation: IAS 7
Gather the records before calculating
Use records covering the same reporting period. You will usually need:
- The profit and loss account and opening and closing balance sheets.
- Reconciled bank records and details of cash equivalents.
- Customer, supplier and inventory schedules.
- Fixed-asset records, including purchases, disposals and depreciation.
- Loan movements, owner funding and relevant tax-payment records.
- Details of transactions that changed balances without moving cash.
The last point deserves attention. A movement between two balance sheets does not always equal a cash flow. Foreign-exchange movements, write-offs and assets acquired through financing arrangements can affect the figures.
Keep a working schedule showing where each adjustment came from. A number that cannot be traced back to the records will be difficult to review later.
Understand the three sections of the statement
A cash flow statement groups cash movements into operating, investing and financing activities.
| Section | What it covers in the example below |
|---|---|
| Operating activities | Cash generated through trading, after operating-balance adjustments and income tax paid |
| Investing activities | Cash paid to purchase equipment |
| Financing activities | Loan proceeds received and loan principal repaid |
The indirect method applies to the operating section. You still need the investing and financing sections to explain the total change in cash.
A worked indirect-method example in AED
Assume a small trading business is preparing a statement for a completed reporting period.
It reports profit before tax of AED 100,000. Its records also show depreciation of AED 20,000 and changes in several operating balances.
All figures are hypothetical. For simplicity, the example excludes interest, dividends, asset disposals, foreign-exchange effects and non-cash investing or financing transactions. It assumes the operating-balance movements below contain no other non-cash changes.
Calculate cash generated from operations
| Adjustment | AED |
|---|---|
| Profit before tax | 100,000 |
| Add back depreciation charged to profit | 20,000 |
| Deduct increase in trade receivables | (30,000) |
| Deduct increase in inventory | (15,000) |
| Add increase in trade payables | 10,000 |
| Deduct increase in operating prepayments | (5,000) |
| Add increase in accrued operating expenses | 5,000 |
| Cash generated from operations | 85,000 |
| Deduct income tax paid, assumed to relate to operating activities | (12,000) |
| Net cash from operating activities | 73,000 |
The business generated AED 73,000 of operating cash after the assumed tax payment.
The starting figure is profit before tax, so the reconciliation deducts tax actually paid. It does not deduct the income-tax expense from the profit and loss account as well.
Why do the adjustments move in those directions?
Depreciation reduced profit by AED 20,000 without creating a cash payment during the period. Adding it back removes that non-cash charge from the operating reconciliation.
Receivables increased by AED 30,000. In this simplified example, that means more recognised revenue remained uncollected at the end of the period. The increase reduces operating cash relative to profit.
Inventory also increased. More money remained tied up in stock, so the reconciliation deducts AED 15,000.
The increase in trade payables has the opposite effect. The business had not yet paid suppliers for part of its purchases. That timing difference increases cash relative to the amount it would have held if it had settled those balances.
Prepayments and accrued expenses follow the same timing logic. Cash paid ahead of recognising an expense reduces operating cash; an expense recognised before payment requires an adjustment in the other direction.
Complete the investing and financing sections
The business also paid AED 40,000 for equipment, received AED 20,000 from a new loan and repaid AED 15,000 of existing loan principal.
| Cash movement | AED |
|---|---|
| Net cash from operating activities | 73,000 |
| Equipment purchased for cash | (40,000) |
| Net cash used in investing activities | (40,000) |
| Loan proceeds received | 20,000 |
| Loan principal repaid | (15,000) |
| Net cash from financing activities | 5,000 |
| Net increase in cash and cash equivalents | 38,000 |
| Opening cash and cash equivalents | 50,000 |
| Closing cash and cash equivalents | 88,000 |
The final check is:
AED 50,000 + AED 73,000 − AED 40,000 + AED 5,000 = AED 88,000
That closing figure must agree with the reconciled cash and cash-equivalent balances within the statement's scope.
The profit before tax was AED 100,000, while cash increased by AED 38,000. The statement explains the difference through trading balances, tax payments, equipment spending and financing.
Use balance movements carefully
For straightforward operating balances, these directions provide a useful starting point:
| Operating balance | If it increases | If it decreases |
|---|---|---|
| Trade receivables | Deduct | Add |
| Inventory | Deduct | Add |
| Operating prepayments | Deduct | Add |
| Trade payables | Add | Deduct |
| Accrued operating expenses | Add | Deduct |
Apply these directions after reviewing what caused the movement.
For example, a receivable write-off reduces the balance without producing a customer receipt. Treating the entire reduction as cash collected would overstate cash flow unless the reconciliation also deals correctly with the write-off.
The same caution applies to payables for equipment. Those balances need to be considered with investing cash flows rather than automatically included in ordinary supplier adjustments.
Common mistakes to check before signing off
Adding depreciation back twice
Check whether your starting subtotal already excludes depreciation. If it does, adding depreciation again would overstate cash generated.
Treating equipment purchases as an operating expense
Trace cash purchases through the fixed-asset schedule. In this example, the equipment payment appears under investing activities, while depreciation is adjusted in the operating reconciliation.
Counting loan proceeds as revenue
A loan increases cash and creates a liability. It belongs in the financing section in this example.
Using every balance-sheet change as a cash movement
Inspect the underlying entries. Reclassifications and non-cash transactions can change a balance without affecting the bank.
Forcing the closing figure to match
If the reconciliation does not agree, investigate the difference. Check missing bank accounts, duplicated entries, financing movements and the scope of cash equivalents. An unexplained balancing adjustment hides the problem.
Preparing the calculation in Excel
Use one worksheet for the statement and separate schedules for its supporting calculations.
For operating balances, show the opening figure, closing figure, movement and any non-cash adjustment. Link the resulting cash-flow adjustment into the statement.
Keep inflows positive and outflows negative. Add a final control:
Calculated closing cash − reconciled closing cash = zero
A zero difference confirms that the totals agree. It does not, by itself, prove that every movement has been classified correctly.
A reporting change to consider for 2027
IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. Its consequential amendments to IAS 7 require operating profit or loss as the starting point for the indirect method and change requirements for interest and dividend cash-flow classifications. IFRS Foundation: IFRS 18, IAS 7
The example above uses a simplified profit-before-tax reconciliation before those amendments apply. Confirm the reporting framework and standards applicable to your period before using it as a financial-statement template.
How does this differ from a cash-flow forecast?
This statement explains cash movements during a period that has already ended. A forecast estimates future receipts and payments.
Once you understand the historical movements, you can use that information to improve collection assumptions and payment planning. Our 13-week cash-flow forecast guide for UAE small businesses covers that separate planning exercise.
Get help with the records behind the statement
A useful cash flow statement starts with reconciled accounts and clear supporting schedules. If the figures do not agree, resolve the underlying entries before relying on the report.
A&A Associate's accounting and financial reporting services can help you discuss the records, reconciliations and reporting support your business needs. Share the reporting period, latest accounts and available schedules so the team can assess the work and agree a scope.
