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CA Final · Financial Reporting

Ind AS 7 Statement of Cash Flows for CA Final

Ind AS 7 requires an entity to report cash flows of the period under three heads: operating, investing and financing. To solve a question, fix cash and cash equivalents, classify every item, adjust profit for non-cash and non-operating items, then reconcile the closing cash balance.

What this chapter covers

Ind AS 7 tells users how an entity generated and used cash during a period. Profit is an accrual figure. Cash flow shows liquidity. The standard asks you to split all cash movements into operating, investing and financing activities, and to reconcile the opening and closing balance of cash and cash equivalents.

In the exam, this chapter is mostly a numerical exercise. You get a balance sheet, a statement of profit and loss and some notes. You must build the statement, often with adjustments such as asset disposals, tax paid, interest, dividends, or a business acquired or disposed of during the year. At Final level, expect group situations, where you handle cash flows on gaining or losing control of a subsidiary, and foreign currency items.

This chapter connects to the rest of the paper. You need Schedule III (Division II) line items to read the balance sheet. You need Ind AS 16, Ind AS 12, Ind AS 21, Ind AS 103, Ind AS 110 and Ind AS 109 to understand the non-cash adjustments. A good cash flow answer shows that you know how those standards affect the figures.

Cash flow statement questions are number-heavy and rule-based, so a careful student can score well here. The method is the same each time, and marks are given for each correct working line and classification. A case-scenario MCQ can also test one classification rule, such as where interest paid or a bank overdraft goes. Strong preparation here also helps you in consolidation and in integrated case studies, where cash flow figures are used to judge a company.

Ind AS 7 Statement of Cash Flows: topics in the order to study them

  1. 1Objective, Scope and Key Definitions of Ind AS 7Everything depends on the definitions, especially cash equivalents, so learn them first.
  2. 2Classification of Cash Flows into Operating, Investing and FinancingYou cannot build the statement until you can place each item under the correct head.
  3. 3Reporting Operating Activities: Direct and Indirect MethodThis is the main working in most questions, so practise it once classification is clear.
  4. 4Presentation of Statement of Cash Flows and Special ItemsOnce the core method is clear, add gross versus net reporting, interest, dividends, tax, foreign currency and non-cash transactions.
  5. 5Subsidiaries, Associates and Joint Ventures in Cash FlowsThis is the harder layer; it needs the basic statement and consolidation concepts in place.
  6. 6Changes in Liabilities from Financing and Ind AS vs IAS 7 DifferencesFinish with disclosure requirements and differences, which are short and easy to revise once the rest is firm.

How to prepare Ind AS 7 Statement of Cash Flows

Treat this chapter as a procedure you can repeat. Learn the rules once, then practise the same steps on varied questions until the layout is automatic.

  1. Read the definitions of cash, cash equivalents and the three activities, and write a one-page classification table in your own words.
  2. Practise the indirect method on simple questions first: start with profit before tax, add back non-cash and non-operating items, then adjust for working capital changes.
  3. Build every adjustment in a separate working note, such as fixed asset, investment, borrowings, reserves and tax accounts, before you enter figures in the statement.
  4. Solve a few direct method questions so you can derive cash received from customers and cash paid to suppliers.
  5. Practise group questions on acquisition or disposal of subsidiaries, showing the net cash effect in investing activities and handling dividends and interest from investees.
  6. Do timed full questions, then check that closing cash and cash equivalents agree with the balance sheet.
  7. Prepare a short list of required disclosures and Ind AS differences, and revise it with the classification table.

Common mistakes in Ind AS 7 Statement of Cash Flows

  • Treating every balance sheet change as a cash flow.

    Fix: For each line, ask whether cash actually moved. Use a reconciliation working for the account first, then enter only the cash part.

  • Placing items under the wrong head, such as classifying a loan repayment as operating or sale proceeds of a fixed asset as operating.

    Fix: Ask what the item represents. Long-term assets and investments go to investing. Capital and borrowings go to financing. Keep your classification table handy.

  • Adjusting profit before tax and forgetting to deduct tax paid, or using the tax expense instead of tax actually paid.

    Fix: Build a tax account with opening and closing provision or asset, and derive the cash paid from it.

  • Adding back interest and dividend items in operating profit but not showing the actual cash flow in the correct section.

    Fix: When you remove finance cost or investment income from operating profit, enter the actual cash under the head Ind AS 7 prescribes. Interest paid and dividends paid go under financing. Interest and dividends received go under investing. There is no choice by type of entity.

  • Showing the whole consideration for an acquisition or disposal of a subsidiary instead of the net cash effect.

    Fix: Take cash consideration paid or received, then deduct cash and cash equivalents held by the subsidiary at that date, and show the result in investing activities.

  • Closing cash does not agree with the balance sheet and the student stops without finding the error.

    Fix: Always reconcile opening cash plus net change to closing cash, and re-check the definition used if there is a mismatch.

Last-day revision: Ind AS 7 Statement of Cash Flows

  • Ind AS 7 applies to all entities that prepare financial statements under Ind AS, and the statement is part of a complete set.
  • Cash equivalents are short-term, highly liquid investments readily convertible to known cash amounts and subject to insignificant risk of change in value.
  • An investment normally qualifies as a cash equivalent only if its original maturity is three months or less from the date of acquisition.
  • Bank overdrafts repayable on demand that form an integral part of cash management are included in cash and cash equivalents.
  • Operating activities are the main revenue-producing activities and others that are not investing or financing.
  • Investing covers acquisition and disposal of long-term assets and investments not in cash equivalents.
  • Financing covers changes in owners' capital and borrowings.
  • Under the indirect method, start with profit or loss and adjust for non-cash items, accruals and items shown under investing or financing.
  • Cash flows from interest and dividends are disclosed separately. Under Ind AS 7, interest paid and dividends paid are financing activities, and interest and dividends received are investing activities. Apply this consistently.
  • Income taxes paid are generally operating, unless they can be specifically identified with investing or financing activities.
  • Cash flows on obtaining or losing control of a subsidiary are shown separately under investing activities.
  • Disclose changes in liabilities arising from financing activities, including both cash and non-cash changes.

Ind AS 7 Statement of Cash Flows practice questions

Ind AS 7 Statement of Cash Flows in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Ind AS 7 Statement of Cash Flows: frequently asked questions

Is Ind AS 7 mainly theory or numericals in CA Final?

It is mainly numerical, but theory matters for classification and disclosure. A case-scenario MCQ or a short written answer can test a single rule. Prepare both the method and the rules.

Which method should I use, direct or indirect?

Use the method the question asks for. If it does not specify, the indirect method is the common choice in practice and the faster one in the exam. Still practise the direct method, because questions may ask for it or for a figure such as cash collected from customers.

Where are interest and dividends shown in the cash flow statement?

Ind AS 7 requires cash flows from interest and dividends received and paid to be disclosed separately. Interest paid and dividends paid are classified as financing activities. Interest and dividends received are classified as investing activities. This differs from IAS 7, which allows a choice, so do not apply the entity-type choice in an Ind AS answer.

How do I handle a subsidiary acquired or sold during the year?

Show the aggregate cash flow from obtaining or losing control as a separate line in investing activities. It is the cash consideration net of cash and cash equivalents held by the subsidiary. Then remove the effect of the subsidiary's assets and liabilities from the working capital movements you use for operating activities.