CA Intermediate · Advanced Accounting

AS 3 Cash Flow Statement: formula sheet

Full chapter guide

Key formulas

Cash: Cash = Cash in hand + Demand deposits with banks; Demand deposits are those withdrawable without notice or penalty, such as current and savings accounts.
Cash equivalents test: Short-term + Highly liquid + Convertible into known cash + Insignificant risk of value change + Held for short-term commitments; All conditions must be met. A maturity of three months or less from acquisition is the usual cut-off.
Cash and cash equivalents: Cash and cash equivalents = Cash + Cash equivalents; The cash flow statement explains the change in this total, not only cash.
Net change: Net increase or decrease = Operating + Investing + Financing cash flows; Add this to opening cash and cash equivalents to get closing balance.
Activity classification: Operating = principal revenue-producing; Investing = long-term assets and investments; Financing = owners' capital and borrowings; Operating is the residual category for activities not investing or financing.
Operating activities: Principal revenue-producing activities + all activities that are not investing or financing; Residual bucket. Includes cash from customers, payments to suppliers and employees, and income tax paid (unless linked to investing or financing).
Investing activities: Acquisition and disposal of long-term assets and investments not in cash equivalents; Purchase or sale of fixed assets, investments, and loans given or recovered (for non-financial enterprises).
Financing activities: Changes in size and composition of owners' capital and borrowings; Share issue, buyback, debenture and loan raised or repaid, and dividend paid (normally; AS 3 also permits showing dividend paid as an operating item).
Interest and dividends: non-financial enterprise: Interest paid, interest and dividends received, dividend paid; Interest paid: financing. Interest received and dividend received: investing. Dividend paid: a cost of obtaining financial resources, so normally financing, though AS 3 also permits showing it as an operating item. Disclose each of these separately and classify them consistently from period to period. Also disclose the total interest paid during the period, whether it was charged to profit and loss or capitalised.
Interest and dividends: financial enterprise: Interest paid, interest received, dividends received, dividend paid; AS 3 treats interest paid, interest received and dividends received as operating activities. Dividend paid is a cost of obtaining financial resources, so it is normally financing, though AS 3 also permits showing it as an operating item. Disclose each separately, classify consistently from period to period, and disclose the total interest paid whether expensed or capitalised.
Net change in cash: Net cash from operating ± investing ± financing = Net increase or decrease in cash and cash equivalents; Add the opening balance to get the closing cash and cash equivalents.
Starting point (indirect method): Net profit before tax and extraordinary items; AS 3 starts here. If the question gives profit after tax, add back the tax provision first.
Operating profit before working capital changes: Net profit before tax + Depreciation and amortisation + Interest expense + Loss on sale of fixed assets + Other non-cash expenses − Interest income − Dividend income − Profit on sale of fixed assets − Other non-cash gains; Interest and dividend items are removed because they are shown under financing or investing for a non-financial enterprise.
Working capital adjustments: Increase in current assets → deduct; Decrease in current assets → add; Increase in current liabilities → add; Decrease in current liabilities → deduct; Use only operating items. Exclude cash, bank and current investments, and exclude items such as proposed dividend or tax payable if you are handling them separately.
Cash generated from operations: Operating profit before working capital changes ± Working capital adjustments; This is the figure before tax.
Net cash from operating activities: Cash generated from operations − Income tax paid; Tax paid = Opening tax payable + Tax expense for the year − Closing tax payable (adjust for advance tax as per the data).
Cash received from customers (direct method): Sales (credit) + Opening debtors − Closing debtors; Add cash sales. Adjust for bad debts written off and discount allowed if given.
Cash paid to suppliers (direct method): Purchases + Opening creditors − Closing creditors; Purchases = Cost of goods sold + Closing inventory − Opening inventory.
Cash paid for expenses (direct method): Expense for the year + Closing prepaid − Opening prepaid + Opening outstanding − Closing outstanding; Exclude depreciation and other non-cash charges.
Purchase of fixed assets (net block method): Purchase = Closing net block − Opening net block + Depreciation for the year + Book value of assets sold; Use this when only net block is given. Adjust for revaluation or non-cash additions if the question mentions them.
Purchase of fixed assets (gross block method): Purchase = Closing gross block − Opening gross block + Original cost of assets sold; Use this when gross block and accumulated depreciation are given separately. Exclude revaluation increases.
Cash from sale of fixed assets: Sale proceeds = Book value of asset sold + Profit on sale (or − Loss on sale); Show proceeds in investing. Remove the profit or loss in the operating section.
Purchase or sale of investments: Purchases = Closing − Opening + Cost of investments sold. Sale proceeds = Cost of investments sold + Profit (or − Loss); Non-current investments of other enterprises are investing items. Adjust for any bonus shares received, which are not cash.
Cash from issue of shares: Cash = Increase in share capital + Increase in securities premium − Bonus shares issued − Shares issued for non-cash consideration; Also adjust for share issue expenses written off against premium if paid in cash.
Net borrowings: Cash from borrowings = Closing − Opening + Repayments (for proceeds). Repayment = Opening + New borrowing − Closing; Ignore debentures converted into shares and loans taken for non-cash assets.
Interest and dividend classification (non-financial company): Interest received and dividend received → Investing. Interest paid and dividend paid → Financing; Interest paid means the total paid in the year, including interest that is capitalised. Show dividend actually paid in cash, not the amount declared.
Net cash from the section: Net cash from investing (or financing) = Total inflows − Total outflows; A negative figure is shown in brackets as net cash used in the activity.
Foreign currency cash flow: Reporting currency amount = Foreign currency amount × exchange rate on the date of the cash flow; An average rate may be used for a period if it approximates the actual rates.
Effect of exchange rate on cash held: Closing cash − Opening cash − Net cash from the three activities = Effect of exchange rate changes; Shown as a separate reconciling item. It is not part of operating, investing or financing.
Unusual items rule: Classify by nature into operating, investing or financing; AS 3 requires cash flows associated with extraordinary items to be classified as operating, investing or financing according to their nature and disclosed separately.
Income tax rule: Operating, unless specifically identified with investing or financing; Tax cash flows are disclosed separately.
Subsidiary acquisition or disposal: Net cash flow = Consideration settled in cash − Cash and cash equivalents of the entity acquired or disposed of; Shown as one separate line in investing. Only the cash part of consideration counts.
Non-cash transactions: Excluded from the statement, disclosed elsewhere; Examples: shares issued for a building, conversion of debentures into shares.
Net change in cash: Net increase/(decrease) = Operating CF + Investing CF + Financing CF; Add or subtract the effect of exchange rate changes on foreign currency cash separately, if given. Then: Closing cash and cash equivalents = Opening + Net increase/(decrease).
Indirect method start: Net profit before tax = Closing P&L balance − Opening P&L balance + Transfers to reserves + Dividend paid/proposed charged to P&L balance + Tax charge for the year; Use this when the P&L account is not given and you only have balance sheets. The result is net profit before tax and extraordinary items only when any extraordinary items are separately added back. Transfers to reserves equal the change in reserves only if there are no other reserve movements (such as utilisation of a reserve, bonus issue out of reserves or a capital reserve created otherwise). Adjust if the question gives different appropriations.
Cash from operations: Cash generated from operations = Profit before tax + Depreciation + Interest expense − Interest/dividend income − Profit on sale of assets (add back losses) ± Changes in working capital; For non-financial companies, remove interest and dividend items from operating and show them in financing or investing. For financial enterprises, do not remove them. For financial enterprises, loans and advances to customers and deposits accepted are operating items, so include their changes in the working capital adjustment.
Working capital changes: Increase in inventory or receivables = deduct. Increase in payables = add. Decrease works in reverse.; Use only operating items. For a non-financial enterprise, keep investment sale debtors and fixed asset creditors out. For a financial enterprise, loans and advances and deposits (and related interest receivable or payable) are operating items, so include their changes here.
Tax paid: Tax paid = Opening provision for tax + Tax charged for the year − Closing provision for tax; If advance tax is shown as an asset, include its movement in the working. Show tax paid below cash generated from operations.
Fixed asset purchases: Purchases = Closing net block − Opening net block + Depreciation + Net book value of assets sold; This works only when there are no revaluations, impairments or capital work-in-progress adjustments. If the question gives any of these, adjust for them first. Proceeds on sale = Net book value + Profit (or − Loss). Proceeds go to investing inflows.
Debt and equity flows: Shares issued = Increase in share capital + Increase in securities premium (if cash issue). Borrowings raised or repaid = Change in borrowings, after non-cash conversions.; Exclude bonus shares and conversions of debentures into shares. These do not involve cash.
Classification rule (non-financial): Interest/dividend received → Investing. Interest/dividend paid → Financing.; This is ICAI's treatment for non-financial enterprises. Apply it consistently from period to period. For financial enterprises, interest paid, interest received and dividends received are operating; dividend paid is financing.

Quick revision

AS 3 reports cash flows in three groups: operating, investing and financing.
Cash means cash on hand and demand deposits; cash equivalents are short-term, highly liquid investments easily convertible to known cash with little risk of value change.
Operating activities are the main revenue-producing activities and other activities that are not investing or financing.
Indirect method starts with net profit before tax and extraordinary items and adjusts for non-cash and non-operating items.
Add back depreciation, and remove profit or loss on sale of assets from operating because the sale proceeds go to investing.
Increase in current assets reduces cash; increase in current liabilities increases cash.
Direct method shows gross receipts and payments from operating activities.
Purchase and sale of fixed assets and investments, and interest and dividend received, belong to investing as a rule for non-financial enterprises.
Issue or buyback of shares, debentures and loans, and repayments, belong to financing.
Income taxes are shown separately under operating activities unless they can be specifically linked to investing or financing.
Extraordinary items are disclosed separately within the relevant activity.
Closing cash and cash equivalents must match the balance sheet; always reconcile.

Common mistakes

Treating all bank deposits as cash. Fix: Only demand deposits are cash. A fixed deposit is a cash equivalent only if it has a short original maturity, about three months or less, and is held for short-term needs.
Measuring the three-month limit from the balance sheet date. Fix: Measure maturity from the date of acquisition. An investment bought with a one-year maturity does not become a cash equivalent later.
Showing interest paid as an operating activity for a manufacturing company. Fix: For a non-financial enterprise, interest paid is a cost of raising funds, so it goes under financing. For banks and financial enterprises it is operating. Also disclose total interest paid, whether expensed or capitalised.
Showing interest and dividend received as operating. Fix: For non-financial enterprises, these are returns on investments and loans, so they are investing. They are operating only for financial enterprises. Keep the classification consistent from period to period.
Starting with profit after tax instead of profit before tax and extraordinary items. Fix: If net profit after tax is given, add back the tax provision to reach profit before tax. When only the change in the Profit and Loss balance is given, add back tax provision, proposed dividend, interim dividend and transfers to reserves to derive net profit before tax. Then deduct tax paid separately at the end.
Applying the working capital signs the wrong way round. Fix: Ask one question: did cash go up or down? Higher debtors mean cash is stuck, so deduct. Higher creditors mean you kept cash, so add.
Showing only the profit or loss on sale of a fixed asset in investing activities Fix: Show the full sale proceeds in investing. Adjust the profit or loss in operating activities (deduct profit, add back loss) when starting from net profit.
Using the closing minus opening change in fixed assets as cash purchase Fix: Rebuild the asset account. Add depreciation and the book value of sold assets to the net change to get the purchases.
Showing shares issued for a machine as an investing outflow and a financing inflow. Fix: No cash moved. Exclude it from the statement and disclose it as a non-cash transaction.
Treating every unusual or one-off item as operating. Fix: Classify by nature. Insurance proceeds usually follow what they compensate: a destroyed fixed asset is investing, lost stock or business income is operating. Cash flows from extraordinary items are classified by nature and disclosed separately.

Exam tips

Learn the cash equivalent definition word by word. Most theory questions ask for it and for the reason an item qualifies or fails.
In MCQs, the usual traps are original maturity, equity shares as equivalents, and transfers within cash and cash equivalents.
Always give a reason after classification in written answers. A bare label often earns only part marks.
Note the scope point in short answers: the statement is presented for each period for which financial statements are prepared, and applicability depends on the enterprise level and the Companies Act exemptions.
Practise a quick table of items with columns for category and direction. The same logic carries into full cash flow problems.
Write a one-line reason beside each classification in written answers. The reason is what earns the marks.
Read whether the enterprise is financial or non-financial before you place interest and dividends. Examiners often change this to test you.
Scan the question for non-cash items such as bonus shares, depreciation and asset purchase against shares. Leave them out of the cash flow.