Cash flow statement explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A cash flow statement explains why cash moved between two balance sheet dates, by sorting every movement into operating, investing and financing activities. The indirect method starts from profit and adjusts it for non-cash items and changes in working capital. This guide sets out what AS 3 requires and then builds a complete statement from two invented balance sheets, so that each working note can be checked. The statement is a standard part of the accounts prepared by our financial statement preparation team. For which companies may leave it out, see who need not prepare a cash flow statement.
AS 3, paragraph 8, requires cash flows to be reported under operating, investing and financing activities. Operating cash flow by the indirect method adjusts net profit for non-cash items, changes in inventories and operating receivables and payables, and items whose cash effect is investing or financing (paragraph 20). Outside a financial enterprise, interest paid and dividends paid are financing flows; interest and dividends received are investing flows (paragraph 30); tax paid is operating unless specifically identified otherwise (paragraph 34). The closing figure must equal cash and cash equivalents in the balance sheet.
What AS 3 requires
| Paragraph | What it requires | What it means in the statement |
|---|---|---|
| 5.1, 5.2, 6 | Cash is cash on hand and demand deposits; equivalents are short-term, highly liquid investments with insignificant risk of change in value, normally three months or less from acquisition | Fixed deposits beyond that are investments |
| 7 | Movements between cash and cash equivalents are not cash flows | Moving cash into a liquid fund changes nothing |
| 8, 18, 20 | Classify by activity; operating flows by the direct or the indirect method | Start from profit and reverse non-cash and non-operating items |
| 13 | Gain or loss on sale of plant is in profit, but the cash flow is investing | Add back the loss, show proceeds under investing |
| 15, 17 | Investing: fixed assets and investments bought and sold; financing: capital and borrowings raised and repaid | Group accordingly |
| 30 | Other than financial enterprises: interest paid and dividends paid are financing; interest and dividends received are investing | Do not leave them in operating |
| 34, 35 | Tax on income is separately disclosed and normally operating | Show tax paid, not tax charged |
| 40, 41 | Non-cash transactions, such as assets acquired by issuing shares or converting debt, are excluded and disclosed elsewhere | They never appear in the statement |
For the standard in full, see our AS 3 guide; a shorter note is cash flow statement explained.
Method
- Compute the change in every balance sheet line.
- Prepare working notes: fixed assets (additions and disposals), tax paid, dividend and any capital or loan movement.
- Start with profit before tax; add back depreciation, interest expense and losses on sale; deduct dividend income and gains: the result is operating profit before working capital changes.
- Adjust for the change in inventories, receivables and payables: cash generated from operations. Deduct tax paid.
- List investing flows, then financing flows including interest and dividend paid.
- Add the three nets to the opening cash and agree it to the balance sheet.
Worked example: Rathi Plastics Private Limited
The entity and all figures in this example are invented for illustration.
| Balance sheet | Previous year | Current year |
|---|---|---|
| Equity share capital | 10,00,000 | 12,00,000 |
| General reserve | 2,00,000 | 3,00,000 |
| Surplus in statement of profit and loss | 3,00,000 | 3,80,000 |
| Long-term borrowings | 6,00,000 | 4,00,000 |
| Trade payables | 3,50,000 | 4,50,000 |
| Provision for tax | 1,00,000 | 1,20,000 |
| Total | 25,50,000 | 28,50,000 |
| Fixed assets (net) | 16,00,000 | 17,00,000 |
| Long-term investments | 1,00,000 | 2,00,000 |
| Inventories | 4,00,000 | 5,00,000 |
| Trade receivables | 3,00,000 | 3,60,000 |
| Cash and bank balances | 1,50,000 | 90,000 |
| Total | 25,50,000 | 28,50,000 |
Additional information. Profit before tax 4,00,000 after charging depreciation 1,60,000, interest 60,000 (paid in cash) and a loss of 10,000 on selling a machine of book value 40,000; it includes dividend income of 5,000 received in cash. Tax charged 1,20,000. New fixed assets were bought for cash. 20,000 shares of 10 each were issued at par for cash. The term loan fell by 2,00,000 through repayment. A dividend of 1,00,000 was paid, and 1,00,000 was moved to general reserve.
Working notes.
| Note | Working | Amount |
|---|---|---|
| 1. Fixed assets bought | Closing 17,00,000 + depreciation 1,60,000 + book value of sale 40,000 - opening 16,00,000 | 3,00,000 |
| 2. Sale proceeds | Book value 40,000 - loss 10,000 | 30,000 |
| 3. Tax paid | Opening provision 1,00,000 + charge 1,20,000 - closing 1,20,000 | 1,00,000 |
| 4. Closing surplus | 3,00,000 + (4,00,000 - 1,20,000) - 1,00,000 - 1,00,000 | 3,80,000 (agrees) |
| 5. Investments bought | 2,00,000 - 1,00,000 | 1,00,000 |
| Cash flow statement | Amount | Amount |
|---|---|---|
| A. Operating activities | ||
| Profit before tax | 4,00,000 | |
| Add: depreciation | 1,60,000 | |
| Add: interest expense (a financing item) | 60,000 | |
| Add: loss on sale of machine (an investing item) | 10,000 | |
| Less: dividend income (an investing item) | (5,000) | |
| Operating profit before working capital changes | 6,25,000 | |
| Increase in inventories | (1,00,000) | |
| Increase in trade receivables | (60,000) | |
| Increase in trade payables | 1,00,000 | |
| Cash generated from operations | 5,65,000 | |
| Tax paid | (1,00,000) | |
| Net cash from operating activities | 4,65,000 | |
| B. Investing activities | ||
| Purchase of fixed assets | (3,00,000) | |
| Sale proceeds of machine | 30,000 | |
| Purchase of investments | (1,00,000) | |
| Dividend received | 5,000 | |
| Net cash used in investing activities | (3,65,000) | |
| C. Financing activities | ||
| Proceeds from issue of shares | 2,00,000 | |
| Repayment of term loan | (2,00,000) | |
| Interest paid | (60,000) | |
| Dividend paid | (1,00,000) | |
| Net cash used in financing activities | (1,60,000) | |
| Net decrease in cash (A + B + C) | (60,000) | |
| Cash and cash equivalents at the start | 1,50,000 | |
| Cash and cash equivalents at the end | 90,000 |
Check. Operating 4,65,000 - investing 3,65,000 - financing 1,60,000 = net decrease of 60,000; opening 1,50,000 less 60,000 = 90,000, which equals the cash and bank balance in the current-year balance sheet. Both balance sheets total 28,50,000 on each side (and 25,50,000 in the previous year). The transfer of 1,00,000 to general reserve is a movement between reserves and never appears in a cash flow statement.
Disclosures
Paragraph 40 asks that non-cash investing and financing transactions be disclosed elsewhere. Had Rathi taken a building by issuing shares, the share issue and the building would be left out of the statement and described in the notes. The components of cash and cash equivalents are also disclosed with a reconciliation to the balance sheet.
Common mistakes
- Starting from profit after tax and then also deducting tax paid, which counts tax twice.
- Leaving interest paid inside operating cash flow for a company that is not a financial enterprise.
- Showing the loss on sale of a machine as a cash outflow; add it back and show the proceeds under investing.
- Using the tax charge instead of the tax paid.
- Including a transfer to reserve or a provision as a cash flow.
Need help with a cash flow statement?
If you have two balance sheets and a profit and loss account and want the statement drawn up and tied to the cash balance, our team can prepare it with the working notes. See our financial statement preparation service and send us the draft statements.
Key takeaways
- Classify each movement as operating, investing or financing.
- Indirect method: adjust profit for non-cash items, working capital and investing or financing items.
- Interest paid and dividends paid are financing; interest and dividends received are investing (non-financial enterprises).
- Tax paid, not tax charged, goes in operating activities.
- The closing line must agree to cash and cash equivalents in the balance sheet.
Read next
- Branch accounts of dependent branches
- AS 14, Accounting for Amalgamations
- Depreciation accounting: straight line, written down value and sale of an asset
- AS 3 Cash Flow Statements
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.