Cash Flows: formula sheet

Key formulas

Net change in cash

Closing cash and cash equivalents − Opening cash and cash equivalents = Net cash from operating + investing + financing activities

The statement must reconcile to the change in cash and cash equivalents in the balance sheet.

Three-way classification

Cash flows = Operating + Investing + Financing

AS 3 paragraph 8 requires reporting by these three activities.

Cash equivalent test

Short term + highly liquid + known amount of cash + insignificant risk of value change

All conditions must hold. Ind AS 7 gives about three months or less from acquisition as a normal guide.

Cash management movements

Transfers between cash and cash equivalents = not a cash flow

Excluded from the statement (AS 3 paragraph 7).

Three-way split

Net change in cash = Operating + Investing + Financing cash flows

Add the net cash from each group to get the net increase or decrease in cash and cash equivalents.

Interest paid (non-financial entity)

Interest paid → Financing activities

Same under AS 3 (para 30) and Ind AS 7 (para 31). For a financial enterprise it is operating.

Interest and dividends received (non-financial entity)

Interest received and dividends received → Investing activities

For a financial enterprise they are operating. Disclose each separately.

Dividends paid

Dividends paid → Financing activities

Applies to all entities.

Extraordinary items (AS 3)

Extraordinary item cash flow → Operating, Investing or Financing as appropriate, shown separately

Classify by nature, not by the word extraordinary. AS 3 illustration shows insurance proceeds from earthquake settlement of 180 under operating.

Indirect method (Ind AS 7 para 20)

Operating cash flow = Profit or loss ± changes in inventories, receivables and payables ± non-cash items ± items whose cash effects are investing or financing

Interest income, dividend income and interest expense are removed from profit and shown in their own groups.

Operating profit before working capital changes

Profit before tax + Depreciation + Interest expense + Foreign exchange loss + Loss on sale of assets − Interest income − Dividend income − Profit on sale of assets

Add back non-cash items and items whose cash effect is investing or financing. Remove investing income. Reverse the signs for a gain or loss opposite to the one shown.

Cash generated from operations (indirect)

Operating profit before working capital changes − Increase in debtors + Decrease in debtors − Increase in inventories + Decrease in inventories + Increase in creditors − Decrease in creditors

An increase in an operating asset reduces cash. An increase in an operating liability raises cash.

Net cash from operating activities

Cash generated from operations − Income taxes paid ± Cash flow of an extraordinary item (AS 3 only)

In the AS 3 illustration, the proceeds of 180 from the earthquake settlement are added after the cash flow before the extraordinary item (1,690) to reach 1,870. Ind AS does not allow extraordinary items, so under Ind AS you will not present this line.

Cash receipts from customers (direct)

Sales − Increase in debtors (or + Decrease in debtors)

Use credit sales. Adjust for bills receivable too if the question gives them.

Cash paid to suppliers (direct)

Purchases − Increase in creditors (or + Decrease in creditors)

Purchases = Cost of goods sold + Closing inventory − Opening inventory.

Direct method result

Cash receipts from customers − Cash paid to suppliers and employees = Cash generated from operations

AS 3 illustration: 30,150 − 27,600 = 2,550. It equals the indirect method figure of 2,550.

Purchase of fixed assets

Purchase = Closing gross block − Opening gross block + Cost of assets sold

Use gross values. If only net block is given: Purchase = Closing net block − Opening net block + Depreciation + Book value of assets sold.

Sale proceeds of an asset

Proceeds = Book value + Profit on sale (or − Loss on sale)

Profit or loss is removed in operating activities; the proceeds go to investing.

Investments

Purchase = Closing − Opening + Cost of investments sold

Exclude investments that are cash equivalents or held for trading.

Share capital and premium

Cash from issue = Increase in share capital + Increase in securities premium (excluding bonus shares)

Bonus shares and shares issued for non-cash consideration involve no cash. Deduct any issue expenses paid in cash.

Borrowings

Cash raised or repaid = Closing loan − Opening loan (adjusted for non-cash changes)

Show proceeds and repayments separately where the figures are known.

Dividend paid

Dividend paid = Dividend declared and payable during the year − Increase in dividend payable (or + decrease)

Shown under financing. Do not confuse with proposed dividend in the current year's profit appropriation.

Net cash from the activity

Net cash = Inflows − Outflows

Negative means net cash used in that activity.

Indirect method start

Cash from operations = Profit before tax + non-cash expenses (depreciation) + finance costs − investment income ± loss/gain on sale of assets ± changes in working capital

Para 20 of Ind AS 7 lists these adjustments. Remove interest here only if you show it under financing.

Working capital effect

Increase in receivables or inventories = deduct. Decrease = add. Increase in payables = add. Decrease = deduct.

Use operating items only. Do not mix in loans or investments.

Income tax paid

Tax paid = Tax expense for the year + Opening tax liability − Closing tax liability

The AS 3 illustration: 300 + 1,000 − 400 = 900.

Interest paid

Interest paid = Interest expense + Opening interest payable − Closing interest payable

The AS 3 illustration: 400 + 100 − 230 = 270.

Purchase of fixed assets

Purchases = Closing gross block − Opening gross block + Original cost of assets sold

Use gross cost, not net book value, unless depreciation is added back separately.

Net change and reconciliation

Operating + Investing + Financing = Net change in cash. Opening cash + Net change = Closing cash and cash equivalents

The closing figure must agree with the balance sheet (Ind AS 7 para 45; AS 3 para 42).

Quick revision

• The statement reports cash flows during the period, classified as operating, investing and financing.
• Operating activities are the principal revenue-producing activities and other activities that are not investing or financing.
• Financing activities change the size and composition of contributed equity and borrowings.
• Under the indirect method, start with profit or loss and adjust it.
• Adjust for non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign currency gains and losses.
• Adjust for changes in inventories and operating receivables and payables.
• Remove items whose cash effects are investing or financing cash flows.
• Report major classes of gross receipts and gross payments separately for investing and financing activities, except where net reporting is allowed.
• Classify each flow in the way most appropriate to the business.
• Net change in cash plus opening balance must equal closing cash and cash equivalents.
• Show every working note so you earn marks for method.

Common mistakes

• Treating profit and cash flow as the same. Fix: Remember that the statement shows actual cash movement. Profit includes non-cash items and credit transactions.
• Calling any investment a cash equivalent. Fix: Apply all tests: short term, readily convertible to a known amount, insignificant risk. Ind AS 7 normally needs three months or less from acquisition, and equity investments are generally excluded.
• Showing interest paid as an operating outflow for a manufacturing company. Fix: For non-financial entities, interest paid is financing. Only financial enterprises treat it as operating.
• Placing dividends received under financing. Fix: Dividends received are investing (non-financial entity). Dividends paid are financing.
• Starting from profit after tax and then deducting tax paid again Fix: Begin with profit before tax. Tax is deducted only once, as tax paid, after cash generated from operations.
• Leaving interest and dividend income inside operating profit Fix: In the AS 3 illustration, interest income (300) and dividend income (200) are deducted and interest expense (400) is added back. The cash is shown under investing or financing activities.
• Taking the increase in fixed assets as the purchase Fix: Rebuild the asset account and add back depreciation and the book value of assets sold.
• Showing profit on sale of an asset in investing activities Fix: Adjust the profit or loss in operating activities and show only the sale proceeds in investing.
• Deducting an increase in payables or adding an increase in receivables. Fix: Think in cash terms. More receivables means cash not yet collected, so deduct. More payables means cash not yet paid, so add.
• Using net profit instead of profit before tax as the starting figure. Fix: Rebuild profit before tax and show tax paid separately, from the tax working note.

Exam tips

• Write the definition with the three activities first. It earns marks in almost any theory question.
• For cash equivalents, quote the definition and the three-month guide from acquisition, not from the balance sheet date.
• In a distinction question, give at least four bases and compare both sides on each.
• Mention AS 3 for AS-based questions and Ind AS 7 where the company follows Ind AS. Do not quote paragraph numbers unless sure.
• Always add one limitation: it is historical and does not measure profit.
• Always state the entity type first. One line saying non-financial entity earns the mark for the interest rule.
• Quote the rule in ICSI style: provision, application to the facts, then conclusion. Cite AS 3 para 30 or Ind AS 7 para 31 where relevant.
• In a full statement, show interest paid, interest received and dividends on separate lines in their own groups.