Key Points

A Cash Flow Statement, prepared as per Accounting Standard-3 (AS-3), shows the inflows and outflows of cash and cash equivalents during a specific period. It helps users assess an enterprise's ability to generate and utilize cash.

Cash comprises cash on hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments, readily convertible into cash with a maturity of three months or less from the date of acquisition.

All cash flows are classified into three main categories to provide a structured view of cash movements. These categories are Operating Activities, Investing Activities, and Financing Activities.

Operating activities are the principal revenue-producing activities of an enterprise and are not investing or financing activities. They generally result from transactions that determine the net profit or loss.

Investing activities include the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Examples are the purchase of machinery or the sale of non-current investments.

Financing activities are those that result in changes in the size and composition of the owner's capital and borrowings of the enterprise. This includes issuing shares, raising loans, and repaying borrowings.

The indirect method starts with the 'Net Profit before Tax and Extraordinary Items'. This figure is then adjusted for non-cash items, non-operating items, and changes in working capital to find the cash flow from operations.

Under the indirect method, non-cash expenses like depreciation, goodwill amortization, and provisions are added back to the net profit because they do not involve an outflow of cash.

Items of income or expense associated with investing or financing activities are adjusted. For example, profit on the sale of an asset is deducted, while a loss is added back to net profit.

An increase in current assets (like trade receivables) or a decrease in current liabilities (like trade payables) is deducted from operating profit. Conversely, a decrease in current assets or an increase in current liabilities is added.

For a non-financial enterprise, interest and dividends received are classified under investing activities. Interest and dividends paid are classified under financing activities.

Cash flow from income tax is generally classified as an operating activity and shown as a deduction to arrive at net cash from operations. Tax related to investing or financing activities is classified accordingly.

Transactions that do not require the use of cash, such as the acquisition of machinery by issuing shares, are excluded from the Cash Flow Statement. They must be disclosed separately in the financial statements.

Cash flows from extraordinary items, like insurance proceeds from a flood, should be disclosed separately under the appropriate activity (operating, investing, or financing) to highlight their non-recurring nature.

The statement concludes by summing the net cash from all three activities to find the 'Net Increase/Decrease in Cash'. This amount is added to the opening balance of cash and cash equivalents to reconcile with the closing balance.