CMA Intermediate · Financial Management and Business Data Analytics

Cash Flow Statement - Preparation and Analysis: formula sheet

Full chapter guide

Key formulas

Core cash flow equation: Net change in cash = Operating CF + Investing CF + Financing CF; Add the net change to opening cash and cash equivalents to get the closing balance.
Closing balance: Closing cash and cash equivalents = Opening balance + Net increase (or − Net decrease); This must agree with the balance sheet figure for cash and cash equivalents.
Cash equivalent test: Short-term + highly liquid + known amount of cash + insignificant risk of value change; Normally original maturity of three months or less from the date of acquisition. All conditions must hold.
Three activity classes: Operating = main revenue-producing activities; Investing = long-term assets and investments; Financing = owner capital and borrowings; Classify by the nature of the activity, not by the balance sheet label alone.
Direct vs indirect method: Direct: gross receipts − gross payments. Indirect: Net profit before tax adjusted for non-cash and non-operating items and working capital changes; Both give the same operating cash flow. Investing and financing sections are the same either way.
AS 3 vs Ind AS 7: interest and dividend: AS 3 (non-financial enterprises): interest paid and dividends paid = financing; interest and dividends received = investing. Ind AS 7: interest and dividends paid may be operating or financing; interest and dividends received may be operating or investing; the choice is applied consistently; Financial enterprises can treat interest and dividends as operating under both standards. Always check which standard the question names, and verify the wording against the standard.
AS 3 vs Ind AS 7: other points: Ind AS 7 requires disclosure of changes in liabilities arising from financing activities; AS 3 has no such requirement. Ind AS 7 also covers other disclosures such as cash flows of subsidiaries obtained or lost. Cite only points you are sure of.
Three-way classification: Net change in cash = Operating CF + Investing CF + Financing CF; Add this to the opening cash and cash equivalents to get the closing balance.
Test for investing: Long-term asset or investment bought or sold, or loan given or recovered = Investing; Includes fixed assets, long-term investments, and loans advanced to others.
Test for financing: Change in share capital or borrowings, buyback, dividend paid = Financing; Raising or repaying owners' funds or loans from lenders. Dividend paid is financing under AS 3 for a non-financial company; Ind AS 7 also permits operating if applied consistently.
Default rule: Not investing and not financing = Operating; Includes income tax paid, unless it can be specifically linked to investing or financing.
Interest and dividend placement under AS 3 (non-financial company): Interest paid, dividend paid = Financing; interest and dividend received = Investing; This is the AS 3 position for a non-financial enterprise. Financial enterprises show these as operating. Follow the question's instruction if it says otherwise.
Interest and dividend placement under Ind AS 7: Paid = Operating or Financing; Received = Operating or Investing (applied consistently); Ind AS 7 gives a choice, not a single default. Pick one presentation, state it, and use it every period.
Non-cash items: Depreciation, provisions, write-offs, bonus issue = no cash flow; Never show them as a separate cash flow. In the indirect method they are only adjustments to profit.
Indirect method format: Net profit before tax + non-cash expenses + non-operating losses + finance costs − non-operating gains − investment income = Operating profit before working capital changes; Non-cash: depreciation, amortisation, goodwill or preliminary expenses written off, provisions made. Non-operating: loss or profit on sale of fixed assets or investments. Finance cost is added back because interest paid is shown under financing. Interest and dividend income are deducted because they are shown under investing.
Cash generated from operations: Operating profit before working capital changes − increase in current assets (or + decrease) + increase in current liabilities (or − decrease); Use only operating current assets and liabilities: debtors, bills receivable, inventory, prepaid expenses, creditors, bills payable, outstanding expenses. Leave out cash and bank balances.
Net cash from operating activities: Cash generated from operations − income tax paid (+ refund received); Income tax paid is normally an operating cash outflow. Show it as one separate line below cash generated from operations.
Direct method format: Cash receipts from customers − cash paid to suppliers − cash paid to employees − other operating cash expenses = Cash generated from operations; Then deduct income tax paid to get net cash from operating activities.
Cash received from customers: Credit sales + opening debtors − closing debtors (adjust for bad debts and discounts allowed, if any) + cash sales; Bad debts written off and discount allowed reduce the cash collected from debtors.
Cash paid to suppliers: Purchases + opening creditors − closing creditors, where Purchases = Cost of goods sold + closing stock − opening stock; Add cash purchases if given separately.
Purchase of fixed assets (net block method): Purchase = Closing net block − Opening net block + Depreciation + Book value of assets sold; Use only if there is no revaluation. Adjust for any asset bought on credit or against shares if given.
Sale of fixed assets: Cash received = Book value of asset sold + Profit on sale (or − Loss on sale); The profit or loss is removed from operating profit as a non-operating item, and the full sale proceeds are shown in investing.
Shares issued for cash: Cash = Increase in share capital + Increase in securities premium (excluding bonus shares and shares issued for non-cash consideration); Check for calls in arrears or advance and for issue expenses written off against premium.
Borrowings: Raised or repaid = Closing balance − Opening balance (when only one of the two happened); If the question gives both raised and repaid, show them separately as gross figures.
Interest paid: Interest paid = Interest expense + Opening interest accrued − Closing interest accrued; Usually shown in financing for non-financial companies. AS 3 and Ind AS 7 allow a consistent alternative, so follow the question if it says otherwise.
Dividend paid: Dividend paid = Dividend declared + Opening unpaid dividend − Closing unpaid dividend; Only the cash actually paid in the year. Dividend merely proposed is not a cash flow. Usually shown in financing.
Interest and dividend received: Received = Income earned + Opening receivable − Closing receivable; Usually shown in investing activities for non-financial companies. A consistent alternative is allowed, so follow the question.
Net cash from a section: Net = Total inflows − Total outflows; A negative investing figure is normal for a growing business.
Net change in cash: Net increase/(decrease) in cash = Operating CF + Investing CF + Financing CF; Must equal closing cash and cash equivalents minus opening cash and cash equivalents.
Operating profit before working capital changes: Net profit before tax + Depreciation + Loss on sale of assets − Profit on sale of assets + Interest expense − Interest and dividend income; Under AS 3, interest paid is normally shown under financing, and interest or dividend received under investing, for non-financial enterprises. Dividend paid is a financing outflow. The question's instruction prevails if it says otherwise.
Working capital adjustments: Increase in current assets: deduct. Decrease in current assets: add. Increase in current liabilities: add. Decrease in current liabilities: deduct.; Apply to inventory, receivables, prepaid items and payables. Cash is excluded.
Cash generated from operations: Cash generated from operations = Operating profit before working capital changes ± Working capital adjustments; Income tax paid is deducted after this line to get net cash from operating activities.
Tax paid: Tax paid = Opening provision + Tax charged to P&L − Closing provision; Use the provision account as a working note.
Fixed assets purchased: Purchases = Closing net block − Opening net block + Depreciation + Book value of assets sold; Use gross block and accumulated depreciation accounts if both are given.
Net profit before tax from reserves: Profit for the year = Closing P&L balance − Opening P&L balance + Transfers to reserves + Dividends; Use it when the profit figure is hidden in the change of the P&L balance. Tax must then be added back to get profit before tax.
Net change in cash: Net change in cash = CFO + CFI + CFF; CFO, CFI and CFF are cash flows from operating, investing and financing activities, with signs. Add the opening balance to get closing cash and cash equivalents.
Free cash flow: Free cash flow = Cash flow from operations − Capital expenditure; Capital expenditure means cash paid for fixed assets. State this definition in your answer because other versions also adjust for interest or debt.
Operating cash flow ratio: Operating cash flow ratio = CFO ÷ Current liabilities; A liquidity test. Higher means better cover for short-term obligations. Some books use average current liabilities, so follow the data given.
Cash flow to net profit (quality of earnings): Quality of earnings = CFO ÷ Net profit after tax; Close to or above 1 suggests profit is backed by cash. A persistently low value is a warning.
Operating cash margin: Cash flow to sales = CFO ÷ Net sales × 100; Shows how many paise of operating cash each rupee of sales produces.
Cash flow to debt (debt coverage): Cash flow to debt = CFO ÷ Total debt; A solvency measure. A higher ratio means debt can be repaid sooner from operating cash.
Cash interest coverage: Cash interest coverage = (CFO + Interest paid + Tax paid) ÷ Interest paid, when interest paid is classified within operating activities. If interest paid is a financing outflow, use (CFO + Tax paid) ÷ Interest paid.; Add back only the items actually deducted in arriving at CFO, to get cash before interest and tax. Under AS 3 / Ind AS 7, interest paid by non-financial companies is usually a financing outflow, so CFO already excludes it and you should not add it back. Check the classification and follow the data given.
Capital expenditure coverage: Capex coverage = CFO ÷ Capital expenditure; Above 1 means expansion is funded from operations. Below 1 means outside funds are needed.
Cash dividend coverage: Dividend coverage = CFO ÷ Dividends paid; Shows how safely dividends are covered by operating cash.
Cash flow statement vs fund flow statement: Cash flow: basis = cash and cash equivalents. Fund flow: basis = working capital (usually); Fund flow has a separate schedule of changes in working capital. Cash flow groups items into operating, investing and financing activities.

Quick revision

Cash flow statement groups flows into operating, investing and financing activities under AS 3 / Ind AS 7.
Cash equivalents are short-term, highly liquid investments that are readily convertible to known cash amounts with insignificant risk of value change.
Indirect method starts from profit and adjusts for non-cash items, non-operating items and working capital changes.
Add back depreciation and amortisation. Add back losses and deduct gains on sale of assets; show the actual sale proceeds under investing activities.
An increase in current assets reduces cash; an increase in current liabilities increases cash.
Purchase and sale of fixed assets and investments are investing flows, and sale is taken at proceeds, not book value.
Issue of shares, debentures and loans, and their repayment, are financing flows.
Bonus shares and conversion of debentures into shares involve no cash, so they are not shown as flows.
Income tax paid is normally shown under operating activities unless it is clearly linked to investing or financing.
For non-financial companies under AS 3, interest and dividends paid are financing; interest and dividends received are investing. Ind AS 7 allows a choice of classification, which must be applied consistently.
Net increase or decrease in cash plus opening cash must equal closing cash.
Positive operating cash flow over time indicates a business that funds itself from its core activity.

Common mistakes

Treating profit or depreciation as a cash flow Fix: Remember that depreciation is a non-cash charge. It is added back only in the indirect method, and only to reach cash from operations.
Calling any short-term investment a cash equivalent Fix: Apply all tests, including the three-month maturity from acquisition. An investment bought with one year to maturity is not a cash equivalent even if it matures soon.
Showing depreciation or provision as a cash outflow under operating activities. Fix: Ask whether cash left the business. Depreciation and provisions only adjust profit in the indirect method.
Treating purchase of goods or sale of inventory as investing. Fix: Investing covers long-term assets and investments. Trading stock belongs to operating.
Reversing the sign on working capital changes, for example adding an increase in debtors. Fix: Remember: assets go opposite to cash, liabilities go with cash. Debtors up means minus. Creditors up means plus.
Adding interest income and dividend income to operating profit instead of deducting them. Fix: Deduct them from profit before tax because they are shown under investing activities. Likewise add back interest expense, which is shown under financing.
Taking the increase in fixed assets as the purchase. Fix: Always rebuild the asset account: add depreciation and book value of sales to the increase in net block.
Showing only the profit or loss on sale of an asset. Fix: Show the full sale proceeds in investing. Remove the profit or loss from the operating section.
Treating an increase in current assets as an addition to cash. Fix: Remember that more inventory or receivables means cash is tied up, so deduct. More payables means you kept cash longer, so add.
Starting with net profit after tax or the P&L closing balance. Fix: Start with net profit before tax and extraordinary items. Rebuild it from the P&L balance, transfers, dividend and tax charge, and show tax paid separately.

Exam tips

Expect MCQs on cash equivalents, classification of one item, or the standard-specific treatment of interest and dividends. Read the standard named in the question.
In theory answers, give points in short bullets with a heading for each: meaning, objectives, benefits, limitations. This earns step marks.
When asked for AS 3 vs Ind AS 7 differences, write a two-column comparison and keep only points you are sure of.
Write the closing check, opening cash plus net change equals closing cash, in numerical answers.
There is no negative marking in the MCQ section, so attempt every question.
In MCQs, first test whether cash moved. Many options are non-cash items placed as traps.
In written answers, draw three clear heads and total each one. Step marks are given for correct classification even when a figure is wrong.
Write one line stating your assumption for interest and dividend whenever the question does not specify, and name the standard you are applying.