Cash Flow Statement
Framework (AS-3)
Cash flows are grouped into operating, investing and financing activities, and the statement reconciles opening and closing cash and cash equivalents. The indirect method starts from net profit before tax and adjusts for non-cash and non-operating items.
Adjustment sequence
Add back depreciation, amortisation, loss on sale of assets and interest on borrowings; deduct profit on sale of assets and interest or dividend income. Then adjust working capital: an increase in a current asset is subtracted, an increase in a current liability is added. Tax paid and dividends received are operating; purchase and sale of fixed assets and investments are investing; issue of shares and debentures, borrowings and dividend paid are financing, and interest paid on borrowings and debentures is shown as financing for a non-financing company.
Worked example
Net profit before tax ₹5,00,000; depreciation ₹80,000; profit on sale of machinery ₹20,000; debtors increased ₹60,000; creditors increased ₹40,000. Cash from operations before tax = 5,00,000 + 80,000 − 20,000 − 60,000 + 40,000 = ₹5,40,000.
Traps
Treating sale proceeds of a fixed asset as operating cash; forgetting to remove the profit on sale; adding a decrease in a current liability; classifying interest paid inconsistently; and ignoring tax paid shown as a separate line.