Auditors look hard at this statement.
The cash flow statement is often the last one built for a first audit, from the other two, in January. It also goes wrong more than people expect. In a December 2023 statement, the SEC’s Chief Accountant called it a leading area of restatements, citing an Audit Analytics review that ranks cash flows fourth among accounting issues behind restatements from 2003 to 2022. Most of those were corrected quietly in the next year’s comparatives.
The same statement makes a point worth taking to heart before the first audit: the staff has not accepted arguments that an error is immaterial because it is only a classification error, since classification is what the statement is for. It asks for controls aimed directly at classification and at the noncash disclosure, and asks auditors to do more than reconcile the statement to the balance sheet.
Current how-to guides, like this one from Lili, explain the indirect method well: start with net income, add back depreciation, adjust for working capital. They stop before the parts that produce restatements. So here is one example year, worked through.
One software company, one year.
A software company is preparing its first audited statements for the year ended 31 December 2026. Every figure is an example, in US dollars, and the balance sheet balances in both years.
| Line | 31 Dec 2025 | 31 Dec 2026 | Change |
|---|---|---|---|
| Cash | 900,000 | 1,405,000 | +505,000 |
| Accounts receivable | 300,000 | 480,000 | +180,000 |
| Prepaid expenses | 60,000 | 90,000 | +30,000 |
| Equipment at cost | 200,000 | 380,000 | +180,000 |
| Accumulated depreciation | (40,000) | (100,000) | (60,000) |
| Accounts payable | 120,000 | 210,000 | +90,000 |
| Accrued expenses | 80,000 | 95,000 | +15,000 |
| Deferred revenue | 500,000 | 740,000 | +240,000 |
| Note payable to equipment vendor | 0 | 30,000 | +30,000 |
| Bank term loan | 0 | 250,000 | +250,000 |
| Equity | 720,000 | 930,000 | +210,000, the year’s net income |
Three facts sit behind those changes, and all three are in the ledger. The company bought 180,000 of equipment: it paid 100,000 during the year, a 50,000 invoice from December was still unpaid at year end, and 30,000 was financed by a note to the vendor, so no cash moved for that part. It drew 300,000 on a three year term loan in March and repaid 50,000 by December. It issued no shares and paid no dividends.
Both builds land on 505,000.
The mechanical build takes each balance sheet change and drops it into a section: payables into operating, equipment into investing, the loan and the note into financing. The corrected build goes behind the three facts above.
| Line | Mechanical | Corrected |
|---|---|---|
| Net income | 210,000 | 210,000 |
| Depreciation | 60,000 | 60,000 |
| Increase in receivables | (180,000) | (180,000) |
| Increase in prepaid expenses | (30,000) | (30,000) |
| Increase in payables | 90,000 | 40,000 |
| Increase in accrued expenses | 15,000 | 15,000 |
| Increase in deferred revenue | 240,000 | 240,000 |
| Net cash from operating activities | 405,000 | 355,000 |
| Purchases of equipment | (180,000) | (100,000) |
| Net cash used in investing activities | (180,000) | (100,000) |
| Term loan, proceeds | 250,000, net | 300,000 |
| Term loan, repayments | not shown | (50,000) |
| Note payable to equipment vendor | 30,000 | not shown, disclosed |
| Net cash from financing activities | 280,000 | 250,000 |
| Net change in cash | 505,000 | 505,000 |
Both columns end on a net change of 505,000, which is exactly the movement in cash on the balance sheet. The usual first check, that the statement ties, passes on the wrong one. Yet operating cash flow is overstated by 50,000, or 14 percent, investing outflows by 80,000, and financing shows a 30,000 borrowing that never brought in a dollar. For a company whose investors watch operating cash flow, that first column tells the wrong story.
Three changes need a second look.
Unpaid equipment. The 50,000 December invoice sits in payables, so the mechanical build counts it twice: once as an operating inflow inside the payables change and once as an investing outflow inside equipment. Neither happened in cash. Take it out of both and disclose it. When the supplier is paid in 2027, that payment is the investing outflow.
Financed equipment. The 30,000 vendor note bought an asset with a liability. Deloitte’s Roadmap on ASC 230 lists this as a noncash investing and financing activity: disclosed, not in the statement. Where a deal is part cash and part not, only the cash part goes in. IAS 7 takes the same approach for IFRS reporters. Repayments of the note later are financing outflows.
The term loan. The balance moved by 250,000, but two cash events happened. ASC 230-10-45-7 prefers gross receipts and payments, and 45-9 allows net reporting of debt only where the original maturity is three months or less. A three year loan shows 300,000 drawn and 50,000 repaid.
The pattern is the same each time. A balance sheet change is a summary, and the statement needs the events inside it. Building a short list of those events for each changed line, with the cash part and the noncash part side by side, is most of the work, and it doubles as the support the auditor will ask for.
Check each section against the cash itself.
The strongest check is independent of the balance sheet. Take the bank ledger for the year, classify every line by what the money was for, and total each activity. That is the direct method in all but presentation, and the SEC statement encourages companies to consider it, noting that technology may have made gross receipts and payments easier to collect. In the example, the cash lines total 355,000 operating, 100,000 investing out and 250,000 financing. The mechanical column fails that check on all three sections even though its total is right.
| Check | What good looks like in the example |
|---|---|
| Ending cash equals the balance sheet. | It does, to the dollar. Necessary, and it proves nothing about classification. |
| Each section agrees with the cash account itself. | Classify every line in the bank ledger by activity. Operating, investing and financing each match the statement, not only the total. |
| Asset additions are split three ways. | Additions of 180,000 = 100,000 paid + 50,000 still in payables + 30,000 financed. Only the 100,000 is investing. |
| Every borrowing is shown gross. | The loan roll forward reads 0 + 300,000 drawn − 50,000 repaid = 250,000, and both cash lines appear. |
| Every balance sheet change without cash is on the noncash list. | The vendor note and the unpaid equipment appear in the disclosure, and nowhere in the three sections. |
For IFRS reporters, one date to plan for: the IFRS 18 amendments to IAS 7 start the indirect method from operating profit and remove the choices for where interest and dividends are presented, from annual periods beginning on or after 1 January 2027. A first IFRS audit of 2027 will be prepared under the new rules from day one.
Classify the cash when it moves.
Every fix above needed one fact: what a particular payment was for. In January that fact is reconstructed from invoices and memory. At the moment of payment it is known. The person paying the equipment supplier knows it is equipment; the person recording the loan drawdown knows it is a loan.
So the cleanest design records the activity on each cash line as it is posted, and lets the statement add those lines up. The balance sheet build then becomes the cross check rather than the only source, and a difference between the two points straight at the entries to look at. A year end review is still needed, but it reviews tags instead of rebuilding them.
How Rivane builds the statement today.
Rivane is built on that design. Every journal line can carry an activity tag, and the cash flow statement adds up the cash and bank lines of posted entries by tag, for any month, quarter or year. Beginning cash is every posted cash line before the period, and ending cash is beginning cash plus the three sections, so the statement and the balance sheet read the same lines.
Rivane cash flow statement, as built
# How Rivane builds the statement today.
source posted entries in the primary
ledger; cash and bank lines only
grouping the activity tag on each line:
operating, investing, financing
beginning every posted cash line dated
before the period
ending beginning + the three sections
check a test recomputes cash account
movement without the tags; it
must equal the net change exactly
tags set by the posting workflow: asset sale
proceeds investing, supplier
payments and receipts operating
no tag a cash line without a tag
counts as operating
overdrafts netted inside cash, as IAS 7
allows for overdrafts repayable
on demand
A test in the codebase recomputes the movement on the cash accounts without looking at tags and requires it to equal the statement’s net change exactly, which is the first check in the table done on every change to the product. Depreciation is posted as non cash, and proceeds from selling an asset are tagged investing.
Some limits worth knowing. A supplier payment is tagged operating whatever the bill was for, so in this example the 100,000 equipment payment would land in operating until it is reclassified; the second and third checks still apply. A manual entry’s tag can be set through the API but not yet in the app’s journal form, and a cash line without a tag counts as operating. The statement shows one total per activity, without the line by line reconciliation from net income. Overdrafts repayable on demand are netted inside cash, as IAS 7 allows; a US GAAP reporter would show an overdraft’s movement in financing.
Build it from the events, check it against the cash.
Go behind every balance sheet change that involved an asset purchase, a borrowing or no cash at all. Show borrowings gross. Keep a noncash list. Then check each section against the bank ledger, not just the total. Done once for the first audit, those working papers become the template for every year after.
If you would like to see how the statement comes together from tagged cash lines in Rivane, book a demo.
Sources
- SEC, Paul Munter, Chief Accountant, The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors (4 December 2023). Read in full on the SEC site: the statement of cash flows as a leading area of restatements, mostly corrected quietly in the next year’s comparatives; the staff’s view that a classification only error is not immaterial by default; the call for direct controls over classification and noncash disclosure; and the encouragement to consider the direct method.
- Deloitte, Roadmap: Statement of Cash Flows, section 3.2, Gross and Net Cash Flows. Read on DART for the text of ASC 230-10-45-7 to 45-9: gross receipts and payments are generally required, and net reporting of debt is limited to items whose original maturity is three months or less.
- Deloitte, Roadmap: Statement of Cash Flows, chapter 5, Noncash Investing and Financing Activities. Read on DART: assets acquired by taking on a related liability are disclosed as noncash activity, and when a transaction has cash and noncash parts, only the cash part goes in the statement.
- IAS Plus, IAS 7 Statement of Cash Flows. Read for the IFRS side: noncash investing and financing transactions are excluded from the statement and disclosed, and the IFRS 18 amendments that start the indirect method from operating profit and remove the presentation choices for interest and dividends, applied with IFRS 18 from 1 January 2027.
- Lili, Using the Indirect Method to Prepare a Cash Flow Statement. Read as a current answer. It walks through net income and balance sheet changes but does not cover unpaid or financed asset purchases, gross borrowing, or how to check classification.
A note on how this was researched. The SEC statement was read in full on the SEC site, and the Audit Analytics ranking is quoted from its footnote rather than from the study itself. The Deloitte Roadmap sections and the IAS 7 summary were read on their own sites. The company and every amount are examples, and both builds were computed in a script and checked by hand. The Rivane section describes the product as built today, checked against the code rather than marketing copy.
On embedded social posts: we looked for public posts from practitioners, standard setters or regulators on cash flow classification and found none we could verify as current, relevant and authentic, so this article uses ordinary citations instead.