How do you prepare a cash flow statement using the indirect method from two balance sheets and a profit and loss statement?

What the interviewer wants to hear

• Starts from profit before tax
• Adds back non-cash items and removes investing and financing items
• Adjusts for working capital changes
• Builds investing and financing sections from asset, loan and equity movements
• Reconciles to the change in cash and cash equivalents

Model answer

I start with profit before tax and add back non-cash items like depreciation, impairment and unrealised exchange losses, and remove items that belong elsewhere, such as interest expense, interest income and profit on sale of assets. Then I adjust for working capital: an increase in receivables or inventory is subtracted, an increase in payables is added, and the reverse for decreases. Deducting taxes actually paid, found from the opening and closing tax balances and the tax charge, gives net cash from operating activities. For investing, I build a fixed asset movement schedule to find purchases and sale proceeds, plus investments bought or sold and interest or dividends received. For financing, I take loan drawdowns and repayments, share issues, dividends and interest paid, and lease liability payments. The total net change must equal the movement in cash and cash equivalents between the balance sheets; if not, a movement has been missed.

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