Cash Flow Statement
AS-3 (revised) requires the cash flow statement to be classified into operating, investing and financing activities, with operating activities usually prepared by the indirect method.
Classification
- Operating: cash generated by the core business. Start with net profit, add back depreciation, amortisation and losses on sale of assets, deduct profits on sale, then adjust changes in working capital and deduct tax paid.
- Investing: purchase and sale of fixed assets and investments, and interest and dividends received.
- Financing: proceeds from shares and debentures, long-term borrowings and repayments, interest paid on borrowings, dividends paid, and bank overdraft.
Worked example
Net profit before tax ₹4,00,000; depreciation ₹60,000; loss on sale of machinery ₹10,000; debtors increased ₹40,000; creditors decreased ₹15,000; tax paid ₹50,000. Cash from operating activities = 4,00,000 + 60,000 + 10,000 − 40,000 − 15,000 − 50,000 = ₹3,65,000.
Rules to remember
- An increase in a current asset is deducted; an increase in a current liability is added.
- Depreciation and losses are added back because they consumed no cash.
- Profit on sale of an asset is deducted in operating activities, and the full proceeds appear under investing.
- Cash equivalents are short-term, highly liquid investments with an original maturity of three months or less.
Traps
- Showing depreciation as a cash outflow.
- Recording only the profit element of an asset sale proceeds under investing.
- Omitting tax paid from operating activities.
- Treating an increase in stock as a source of cash rather than a use.