Cash Flow Statement
Structure
AS-3 (revised) requires cash flows to be classified into operating, investing and financing activities, with a reconciliation of opening and closing cash and cash equivalents. Operating cash flow is derived from net profit before tax by removing non-cash and non-operating items, then adjusting for working capital changes.
Adjustments to net profit
- Add back: depreciation, amortisation, loss on sale of assets, interest expense, provision for tax.
- Deduct: profit on sale of assets, interest income, dividend income.
- Increase in a current asset → deduct; increase in a current liability → add. Reverse for decreases.
Worked example
Net profit before tax ₹1,00,000; depreciation ₹20,000; debtors increased ₹15,000; creditors decreased ₹5,000; profit on sale of machinery ₹8,000. Cash from operations = 1,00,000 + 20,000 − 15,000 − 5,000 − 8,000 = ₹92,000. Income tax paid is then deducted to arrive at net cash from operating activities.
Classification rules
- Interest paid on debentures by a manufacturing company, and dividends paid, are financing outflows.
- Purchase and sale of fixed assets and investments are investing.
- Bank overdraft is financing, unless it forms part of cash management.
- Non-cash transactions, such as issue of shares against assets or bonus shares, are excluded from the statement and disclosed separately.
Marks-losing traps
- Starting from profit after tax and then deducting tax again.
- Treating an increase in debtors as an inflow.
- Showing purchase of machinery as an operating outflow.
- Recording bonus issue as a financing inflow.