Cash Flow Statements

Under Accounting Standard 3 (AS-3 Revised), a Cash Flow Statement reports cash inflows and outflows during an accounting period, classified into three distinct functional streams:

1. 1. Cash Flow from Operating Activities: Principal revenue-producing activities of the enterprise and other activities that are not investing or financing. (The core business engine: cash sales, collections from debtors, cash paid to suppliers and employees).
2. 2. Cash Flow from Investing Activities: Acquisition and disposal of long-term non-current assets and other investments not included in cash equivalents (buying/selling plant, machinery, land, patents, long-term investments; receiving interest and dividends).
3. 3. Cash Flow from Financing Activities: Activities that result in changes in the size and composition of the owner's capital (equity) and borrowings of the enterprise (issuing shares, debentures, taking/repaying bank loans, paying dividends, paying interest).

Cash and Cash Equivalents (CCE)

Short-term, highly liquid investments that are readily convertible to known amounts of cash with an insignificant risk of changes in value (maturity period ≤ 3 months):

• Cash in Hand & Cash at Bank.
• Cheques and Drafts on Hand.
• Current Investments / Marketable Securities / Treasury Bills.

Step 1: Net Profit Before Tax & Extraordinary Items

Net Profit as per Statement of P&L (Closing Balance - Opening Balance)
$+$ Interim Dividend paid during the year
$+$ Proposed Dividend for preceding year paid during the year
$+$ Transfer to Reserves (General Reserve)
$+$ Provision for Tax made during current year
$-$ Refund of Tax credited to P&L

Step 2: Adjustments for Non-Cash & Non-Operating Items

$+$ Depreciation on fixed assets
$+$ Amortization of intangible assets (Goodwill, Patents written off)
$+$ Loss on sale of fixed assets / investments
$+$ Interest on debentures and long-term borrowings paid
$-$ Interest, Dividend, and Rental income received (Investing items!)
$-$ Gain / Profit on sale of fixed assets
= Operating Profit Before Working Capital Changes

Step 3: Adjustments for Working Capital Changes

• $+$ Decrease in Current Assets (inventories sold, cash collected from debtors)
• $+$ Increase in Current Liabilities (cash conserved by delaying payments to creditors)
• $-$ Increase in Current Assets (cash tied up in new inventory/debtors)
• $-$ Decrease in Current Liabilities (cash paid out to settle trade payables)
• (Note: Cash, Bank, and Bank Overdraft are strictly excluded here!)

Step 4: Income Tax Paid

Subtract actual Income Tax Paid during the year (net of tax refund).
= Net Cash Flow from (or Used in) Operating Activities

In CBSE board exam problems, hidden cash flows must be extracted by preparing T-accounts:

A. Provision for Tax Account:

Dr.                              PROVISION FOR TAX ACCOUNT                             Cr.
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To Bank A/c (Tax PAID during year) [Bal Fig] | By Balance b/d (Opening Prov)
To Balance c/d (Closing Prov)                | By Statement of P&L (Prov MADE this year)
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Rule: Tax MADE is added in Step 1 of Operating Activities; Tax PAID is subtracted in Step 4!

B. Machinery Account (when Provision for Depreciation is maintained):

Dr.                                   MACHINERY ACCOUNT                                Cr.
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To Balance b/d (Opening Cost)                | By Bank A/c (Sale proceeds of machine sold)
To Bank A/c (PURCHASE of machine) [Bal Fig]  | By Provision for Depr A/c (Acc Dep on sold machine)
To Gain on Sale of Machinery A/c             | By Loss on Sale of Machinery A/c
                                             | By Balance c/d (Closing Cost)
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