What is a cash flow statement?
Answered 17 March 2026
Based on the retrieved sources, here is a comprehensive answer to your question.
What is a Cash Flow Statement?
This question relates to financial reporting and accounting concepts as referenced in HMRC guidance (primarily in the context of thin capitalisation and debt covenants). There is no specific UK tax legislation defining a cash flow statement, so the answer draws entirely from HMRC guidance.
HMRC Guidance / Practice
A cash flow statement is a financial statement that discloses the underlying cash flows of a business. It provides useful information about a company's ability to service its debt.
More specifically, a cash flow statement can indicate whether a company can pay its employees, settle its debts, pay dividends, and whether it is solvent. This is particularly important because a business may be profitable yet still fail due to a shortage of cash.
A cash flow measure shows the extent of a borrower's ability to meet interest and repayment obligations by excluding non-cash accounting adjustments.
Content and presentation of a cash flow statement is governed by International Accounting Standard 7 (IAS 7). The net operating cash flow figure is typically derived from the operating profit per the Consolidated Profit and Loss Account, adjusted for changes in non-cash transactions, for example, depreciation, amortisation, and changes in working capital.
Who must prepare one:
- All entities adopting IFRS must produce a cash flow statement.
- Under Current UK GAAP and New UK GAAP, some companies are exempt if they qualify as small (as defined by the Companies Act 2006) or are part of a group which prepares publicly available consolidated accounts containing a consolidated cash flow statement.
- UK GAAP companies qualifying for an exemption may nevertheless choose to prepare one.
Where cash flow information is unavailable, a pragmatic approach is to monitor debt using covenants similar to those a third-party bank would use, such as debt:EBITDA and debt:equity ratios.
⚠️ Note: The sources available address cash flow statements primarily in the context of HMRC's thin capitalisation guidance. For a full accounting definition, you may also wish to consult IAS 7 directly or the FRC's FRS 102 (for UK GAAP entities).
Citation sources
identify the net operating cash flow from the Consolidated Cash Flow Statement. This figure is typically the figure for operating profit per the Consolidated Profit and Loss Account adjusted for changes in non cash transactions, for example, depreciation, amortisation, and changes in working capital. A covenant for cash flow cover for the total of interest charged and all debt repayments may then be agreed. Where there is bullet debt (repayable in full at end of the term), a notional annual figu
The underlying cash flows of a business will also be disclosed by its cash flow statement. This statement provide useful information on a borrower’s ability to its service debt, though cash flow based covenants are unusual. Only some entities are required to prepare a cash flow statement. All entities adopting the IFRS must produce a cash flow statement, but under Current UK GAAP and New UK GAAP some companies are exempt from this requirement if they qualify as either small (as defined by the Co
An important measure for a third-party lender is the cash-flow position of the borrower (see INTM515010). This is because a business may be profitable yet still fail because of a shortage of cash. Businesses over extend, the costs associated with income production getting out of synchronisation with the income itself. Companies may take on orders which they cannot afford to fulfil. If a company is obliged to borrow money in order to pay a dividend, it has profits which it cannot realise as cash.
bout the way in which debt and interest are defined and measured to establish the arm’s length result for the company. The manual then looks at the following related topics: Interest Cover INTM516000 Debt and Equity INTM517000 The usual starting point for measuring profits is EBIT - Earnings Before Interest & Tax. In the profit and loss account (UK GAAP) or income statement (IFRS) this is usually referred to as ‘operating profit’, the profit remaining after the deduction of administrative costs.
Companies may also issue securities that are convertible into or exchangeable for shares. The difference between values is spread over the loan period using accounting policies to produce the equivalence of an annual interest charge. The Corporate Finance Manual gives an overview of the ways in which a company may raise finance through borrowing, starting at CFM11000. INTM516030 looks at discounted and convertible debt in more detail. The cash flow statement may provide more information than the