Cash Flow Statement
Indirect Method of AS-3 (Revised) - Without Adjustments
📌 What is Cash Flow Statement?
Cash Flow Statement is a financial statement that shows the inflow and outflow of cash and cash equivalents during a particular accounting period. It helps understand how a company generates and uses cash in its operations, investments, and financing activities.
📖 Meaning of Cash Flow Statement
- AS-3 (Revised): Accounting Standard 3 deals with Cash Flow Statements issued by ICAI
- Financial Statement: Shows movement of cash during the accounting period
- Two Methods: Direct Method and Indirect Method
- Indirect Method: Starts with Net Profit and adjusts it for non-cash items
🎯 Objectives of Cash Flow Statement
- Cash Generation: To understand how the company generates cash from operations
- Cash Utilization: To know where the company is spending its cash
- Liquidity Assessment: To assess the company's ability to meet its obligations
- Financial Planning: To help in future cash flow planning and budgeting
- Investment Decisions: To assist investors in making informed decisions
- Solvency Evaluation: To evaluate the company's long-term solvency
✅ Benefits of Cash Flow Statement
For Management
- Better cash management
- Planning for future needs
- Identifying cash problems early
For Investors
- Understanding profitability vs cash
- Dividend payment capacity
- Investment safety assessment
For Creditors
- Debt repayment ability
- Interest payment capacity
- Credit risk evaluation
💰 Cash and Cash Equivalents
Cash
- Cash in hand (Currency notes and coins)
- Cash at bank (Balance in current and savings accounts)
- Demand deposits (Money available on demand)
Cash Equivalents
- Short-term investments (Maturity within 3 months from date of acquisition)
- Highly liquid investments
- Readily convertible to known amounts of cash
- Examples: Treasury Bills, Commercial Papers, Money Market Funds
📊 Classification of Activities
Three Types of Activities
Investing Activities
Acquisition and disposal of long-term assets
- Purchase of fixed assets
- Sale of fixed assets
- Purchase of investments
- Sale of investments
- Loans given to others
- Loans recovered
Financing Activities
Changes in capital structure
- Issue of shares
- Redemption of shares
- Issue of debentures
- Redemption of debentures
- Borrowing loans
- Repayment of loans
- Dividend paid
🔄 Indirect Method - Step by Step
1
Start with Net Profit
Begin with Net Profit before Tax from Income Statement
2
Add Non-Cash Expenses
Add back expenses that don't involve cash outflow (Depreciation, Amortization, Loss on sale of assets)
3
Deduct Non-Cash Incomes
Deduct incomes that don't involve cash inflow (Profit on sale of assets)
4
Adjust Working Capital Changes
Adjust for changes in Current Assets and Current Liabilities
5
Deduct Tax Paid
Subtract income tax actually paid during the period
📋 Working Capital Adjustments - Quick Reference
| Item | Increase | Decrease | Reason |
|---|---|---|---|
| Current Assets | Deduct (−) | Add (+) | More assets = Cash blocked |
| Debtors/Receivables | Deduct (−) | Add (+) | Money not yet received |
| Inventory/Stock | Deduct (−) | Add (+) | Cash tied up in stock |
| Prepaid Expenses | Deduct (−) | Add (+) | Cash paid in advance |
| Current Liabilities | Add (+) | Deduct (−) | More liabilities = Cash saved |
| Creditors/Payables | Add (+) | Deduct (−) | Payment postponed |
| Outstanding Expenses | Add (+) | Deduct (−) | Not yet paid |
📝 Example 1: Simple Cash Flow Statement
Problem:
ABC Ltd. provides the following information for the year ended 31st March 2024:
| Net Profit before Tax | ₹ 2,00,000 |
| Depreciation on Fixed Assets | ₹ 30,000 |
| Increase in Debtors | ₹ 20,000 |
| Decrease in Creditors | ₹ 15,000 |
| Income Tax Paid | ₹ 50,000 |
Required: Calculate Cash Flow from Operating Activities
Solution:
| ABC Ltd. Cash Flow Statement (Extract) For the year ended 31st March 2024 |
|
|---|---|
| A. Cash Flow from Operating Activities: | |
| Net Profit before Tax | ₹ 2,00,000 |
| Add: Depreciation | ₹ 30,000 |
| Operating Profit before Working Capital Changes | ₹ 2,30,000 |
| Less: Increase in Debtors | (₹ 20,000) |
| Less: Decrease in Creditors | (₹ 15,000) |
| Cash Generated from Operations | ₹ 1,95,000 |
| Less: Income Tax Paid | (₹ 50,000) |
| Net Cash from Operating Activities | ₹ 1,45,000 |
📝 Example 2: Complete Cash Flow Statement
Problem:
XYZ Ltd. provides the following information for the year 2023-24:
| Net Profit for the year | ₹ 3,50,000 |
| Depreciation | ₹ 45,000 |
| Increase in Stock | ₹ 25,000 |
| Decrease in Debtors | ₹ 18,000 |
| Increase in Creditors | ₹ 22,000 |
| Purchase of Machinery | ₹ 1,00,000 |
| Sale of Investments | ₹ 60,000 |
| Issue of Shares | ₹ 1,50,000 |
| Repayment of Loan | ₹ 80,000 |
| Dividend Paid | ₹ 40,000 |
Required: Prepare Cash Flow Statement
Solution:
| XYZ Ltd. Cash Flow Statement For the year 2023-24 |
|
|---|---|
| A. Cash Flow from Operating Activities: | |
| Net Profit | ₹ 3,50,000 |
| Add: Depreciation | ₹ 45,000 |
| Operating Profit before Working Capital Changes | ₹ 3,95,000 |
| Less: Increase in Stock | (₹ 25,000) |
| Add: Decrease in Debtors | ₹ 18,000 |
| Add: Increase in Creditors | ₹ 22,000 |
| Net Cash from Operating Activities (A) | ₹ 4,10,000 |
| B. Cash Flow from Investing Activities: | |
| Purchase of Machinery | (₹ 1,00,000) |
| Sale of Investments | ₹ 60,000 |
| Net Cash from Investing Activities (B) | (₹ 40,000) |
| C. Cash Flow from Financing Activities: | |
| Issue of Shares | ₹ 1,50,000 |
| Repayment of Loan | (₹ 80,000) |
| Dividend Paid | (₹ 40,000) |
| Net Cash from Financing Activities (C) | ₹ 30,000 |
| Net Increase in Cash (A + B + C) | ₹ 4,00,000 |
📚 Practice Questions
Question 1
2 Marks
Define Cash Flow Statement according to AS-3. What are the two methods of preparing it?
Answer:
Cash Flow Statement: According to AS-3 (Revised), Cash Flow Statement is a statement that shows the inflow and outflow of cash and cash equivalents during a particular accounting period. It provides information about the changes in cash position of an enterprise.
Two Methods:
- Direct Method: Shows major classes of gross cash receipts and gross cash payments
- Indirect Method: Starts with net profit and adjusts it for non-cash transactions to arrive at cash flow
Question 2
2 Marks
Distinguish between Cash and Cash Equivalents.
Answer:
| Basis | Cash | Cash Equivalents |
|---|---|---|
| Nature | Physical money and bank balances | Short-term highly liquid investments |
| Examples | Cash in hand, Cash at bank | Treasury Bills, Commercial Papers |
| Maturity | Immediately available | Maturity within 3 months from date of acquisition |
| Liquidity | 100% liquid | Readily convertible to cash with insignificant risk |
Question 3
3 Marks
State any three objectives and three benefits of Cash Flow Statement.
Answer:
Three Objectives:
- Cash Generation Analysis: To understand how the company generates cash from its operating activities and assess the quality of earnings
- Cash Utilization Review: To analyze where and how the company is utilizing its cash resources in investing and financing activities
- Liquidity Assessment: To evaluate the company's ability to meet its short-term obligations and maintain adequate cash reserves
Three Benefits:
- Better Financial Planning: Helps management in planning future cash requirements and making informed financial decisions
- Investment Decision Support: Assists investors and creditors in evaluating the company's ability to generate positive cash flows and pay dividends
- Performance Evaluation: Provides a clear picture of actual cash performance, separate from accounting profits which may include non-cash items
Question 4
3 Marks
Question: From the following information, calculate Cash Flow from Operating Activities:
| Net Profit before Tax | ₹ 1,50,000 |
| Depreciation | ₹ 25,000 |
| Loss on Sale of Machinery | ₹ 8,000 |
| Decrease in Stock | ₹ 12,000 |
| Increase in Debtors | ₹ 15,000 |
| Increase in Creditors | ₹ 10,000 |
| Tax Paid | ₹ 35,000 |
Answer:
| Cash Flow from Operating Activities | |
|---|---|
| Net Profit before Tax | ₹ 1,50,000 |
| Add: Depreciation | ₹ 25,000 |
| Add: Loss on Sale of Machinery | ₹ 8,000 |
| Operating Profit before Working Capital Changes | ₹ 1,83,000 |
| Add: Decrease in Stock | ₹ 12,000 |
| Less: Increase in Debtors | (₹ 15,000) |
| Add: Increase in Creditors | ₹ 10,000 |
| Cash Generated from Operations | ₹ 1,90,000 |
| Less: Tax Paid | (₹ 35,000) |
| Net Cash from Operating Activities | ₹ 1,55,000 |
Question 5
5 Marks
Question: Prepare a Cash Flow Statement for the year ended 31st March 2024 from the following information:
| Net Profit after Tax | ₹ 2,50,000 |
| Depreciation on Fixed Assets | ₹ 40,000 |
| Profit on Sale of Investments | ₹ 15,000 |
| Increase in Debtors | ₹ 30,000 |
| Decrease in Stock | ₹ 20,000 |
| Increase in Creditors | ₹ 25,000 |
| Purchase of Plant and Machinery | ₹ 1,20,000 |
| Sale of Investments | ₹ 65,000 |
| Issue of Equity Shares | ₹ 2,00,000 |
| Redemption of Debentures | ₹ 1,00,000 |
| Dividend Paid | ₹ 50,000 |
Answer:
| Cash Flow Statement For the year ended 31st March 2024 |
|
|---|---|
| A. Cash Flow from Operating Activities: | |
| Net Profit after Tax | ₹ 2,50,000 |
| Add: Depreciation on Fixed Assets | ₹ 40,000 |
| Less: Profit on Sale of Investments | (₹ 15,000) |
| Operating Profit before Working Capital Changes | ₹ 2,75,000 |
| Less: Increase in Debtors | (₹ 30,000) |
| Add: Decrease in Stock | ₹ 20,000 |
| Add: Increase in Creditors | ₹ 25,000 |
| Net Cash from Operating Activities (A) | ₹ 2,90,000 |
| B. Cash Flow from Investing Activities: | |
| Purchase of Plant and Machinery | (₹ 1,20,000) |
| Sale of Investments | ₹ 65,000 |
| Net Cash used in Investing Activities (B) | (₹ 55,000) |
| C. Cash Flow from Financing Activities: | |
| Issue of Equity Shares | ₹ 2,00,000 |
| Redemption of Debentures | (₹ 1,00,000) |
| Dividend Paid | (₹ 50,000) |
| Net Cash from Financing Activities (C) | ₹ 50,000 |
| Net Increase in Cash and Cash Equivalents (A + B + C) | ₹ 2,85,000 |
🔑 Key Points to Remember
- Indirect Method starts with Net Profit and adjusts for non-cash items
- Add back non-cash expenses like Depreciation, Amortization, Loss on sale of assets
- Deduct non-cash incomes like Profit on sale of assets
- Increase in Current Assets = Deduct (Cash blocked)
- Decrease in Current Assets = Add (Cash released)
- Increase in Current Liabilities = Add (Cash saved)
- Decrease in Current Liabilities = Deduct (Cash paid)
- Three Activities: Operating, Investing, and Financing
- Cash Equivalents have maturity within 3 months from acquisition
- Tax Paid is always deducted from operating activities