Cash Flow Statement
What the exam tests
Cash Flow Statement under AS-3 and Ind AS 7 classifies cash flows into operating, investing, and financing. The indirect method starts from net profit before tax and adjusts non-cash and working-capital items.
Core rules
- Operating activities: cash from revenue, payments to suppliers and employees, tax paid. Adjust net profit for depreciation, amortisation, loss or profit on sale of assets, interest expense, and changes in current assets and liabilities.
- Investing activities: purchase or sale of fixed assets, investments, and interest or dividend received unless treated as operating.
- Financing activities: issue or redemption of shares and debentures, borrowings repaid, interest paid, dividends paid.
- Non-cash transactions such as bonus issue, depreciation, and asset purchased by issue of shares are excluded from the statement but disclosed.
- Increase in current asset = outflow; increase in current liability = inflow.
Worked example
Net profit before tax ₹2,00,000. Depreciation ₹30,000; profit on sale of machinery ₹10,000; interest on borrowings ₹15,000; increase in trade receivables ₹25,000; decrease in trade payables ₹5,000; tax paid ₹40,000. Operating cash flow before tax = 2,00,000 + 30,000 − 10,000 + 15,000 − 25,000 − 5,000 = ₹2,05,000. Tax paid ₹40,000 gives ₹1,65,000. Reasoning: depreciation and interest are added back; profit on sale is subtracted; receivables increase uses cash; payables decrease uses cash.
Traps
Adding a decrease in current assets instead of subtracting; deducting tax paid twice; treating interest paid as operating when the exam format classifies it as financing; and including a bonus issue as a cash inflow.