Cash Flow Statement (Operating, Investing and Financing Activities)
Cash Flow Statement tests AS 3 classification and the indirect method for operating activities. The statement explains the change in cash and cash equivalents between two balance-sheet dates.
Three activities
Operating activities: cash from revenue-producing activities. Under the indirect method, start with net profit before tax, add non-cash expenses (depreciation, amortisation, loss on sale), deduct non-cash income (gain on sale), then adjust working capital changes and tax paid. Investing activities: purchase/sale of property, plant and equipment, investments, interest and dividends received. Financing activities: issue/redemption of share capital and debentures, borrowings repaid, interest paid, dividends paid.
Cash and cash equivalents
Include cash, bank balances and short-term highly liquid investments with original maturity of three months or less. Bank overdrafts are included only when they form part of cash management.
Worked example
Net profit before tax ₹5,00,000; depreciation ₹80,000; gain on sale of machinery ₹20,000; increase in trade receivables ₹40,000; increase in trade payables ₹25,000; tax paid ₹60,000. Cash from operating activities = 5,00,000 + 80,000 - 20,000 - 40,000 + 25,000 - 60,000 = ₹4,85,000. Depreciation is added back because it reduced profit without using cash; the gain is subtracted because it belongs to investing; the receivables increase uses cash; the payables increase saves cash.
Traps
Do not show depreciation as a cash outflow. Do not classify interest paid as operating for a non-financial company; it is financing. Purchase of fixed assets is investing even if financed by a loan. Tax paid is operating unless specifically identifiable with investing/financing. Do not include non-cash transactions in the statement; disclose them separately.