Financial Reporting · Ind AS 7 Statement of Cash Flows

Ind AS 7 Statement of Cash Flows: Objective, Scope and Key Definitions

Updated 5 October 2026 · Fact-checked

Ind AS 7 requires an entity to give information about the historical changes in its cash and cash equivalents through a statement that classifies cash flows into operating, investing and financing activities. To solve questions, first decide what is cash or a cash equivalent, then classify each flow by its nature.

Understand Objective, Scope and Key Definitions of Ind AS 7

A balance sheet and a profit and loss statement do not tell you how cash moved. Profit is based on accrual accounting, so a profitable company can still run out of cash. Ind AS 7 fills this gap. Its objective is to require information about the historical changes in cash and cash equivalents of an entity, by means of a statement that classifies cash flows during the period into operating, investing and financing activities.

An entity that prepares financial statements under Ind AS applies the standard in presenting its statement of cash flows. A statement of cash flows is part of a complete set of financial statements, so the requirement is not optional. Users need it to assess the entity's ability to generate cash and cash equivalents, and the timing and certainty of those flows.

Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. They are held to meet short-term cash commitments, not for investment or other purposes. An investment normally qualifies only when it has a short maturity of, say, three months or less from the date of acquisition. Equity investments are normally not cash equivalents.

Bank borrowings are generally financing activities. But bank overdrafts that are repayable on demand and form an integral part of an entity's cash management are included as a component of cash and cash equivalents. The sign of the balance may swing between positive and overdrawn, which is the test of an integral part of cash management.

Cash flows are inflows and outflows of cash and cash equivalents. Movements between cash and cash equivalents are not cash flows, because they are part of cash management rather than operating, investing or financing activity.

The three activities are defined by nature. Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that change the size and composition of the contributed equity and borrowings of the entity.

Key rules to remember

Cash: Cash = cash on hand + demand deposits; Demand deposits are those withdrawable without penalty or notice, such as current account balances with banks.
Cash equivalents: Short-term + highly liquid + readily convertible to known amount of cash + insignificant risk of change in value; All four conditions must hold. The purpose is meeting short-term cash commitments. Maturity is normally three months or less from the date of acquisition.
Bank overdraft: Overdraft repayable on demand and integral to cash management → part of cash and cash equivalents; Otherwise bank borrowings are financing activities.
Closing cash and cash equivalents: Opening cash and cash equivalents + net increase (or − net decrease) in cash and cash equivalents = Closing cash and cash equivalents; The closing figure must reconcile with the amounts in the balance sheet, after including overdrafts that qualify.
Three activities: Operating = principal revenue-producing and other activities; Investing = long-term assets and other investments; Financing = equity and borrowings; Classify by the nature of the activity, not by the label in the ledger.

How to solve Objective, Scope and Key Definitions of Ind AS 7 questions

Use this method for any question on definitions, scope or classification under Ind AS 7.

1Check the entity: if it prepares financial statements under Ind AS, a statement of cash flows is required as part of the complete set.
2List every item given and ask whether it is cash (cash on hand or demand deposit) first.
3Test each investment for cash equivalent status: short-term, highly liquid, convertible to known amount, insignificant risk of value change, and held for short-term commitments. Check maturity from the date of acquisition.
4Treat any bank overdraft: if repayable on demand and integral to cash management, include it in cash and cash equivalents; if not, treat it as a financing item.
5Ignore movements between cash and cash equivalents, since they are not cash flows.
6Classify each real cash flow as operating, investing or financing by its nature.
7State the rule, apply the facts and give a clear conclusion, in provision-facts-conclusion form.

Quickest way: Four-question screen for cash equivalents and activities

When to use it: Use this in the exam when a case lists several balances or flows and asks you to identify cash equivalents or classify the flows.

Is it cash on hand or a demand deposit? If yes, it is cash.
Is it an investment with three months or less to maturity from acquisition, easily converted to known cash, with little value risk? If yes, it is a cash equivalent.
Is it an overdraft repayable on demand and used as part of cash management? If yes, deduct it within cash and cash equivalents.
For all other flows, ask: revenue-producing, long-term asset, or equity and borrowings? Pick operating, investing or financing.

Common mistakes in Objective, Scope and Key Definitions of Ind AS 7

Treating every bank overdraft as a financing item.
Students remember that borrowings are financing and apply it to overdrafts without checking the conditions.
Fix: Check two conditions: repayable on demand and integral to cash management. If both are met, include it in cash and cash equivalents.
Counting a fixed deposit as a cash equivalent just because it is a bank deposit.
The word deposit is confused with demand deposit.
Fix: Test the original maturity from acquisition, and the purpose. A deposit with a long original maturity is an investing item, not a cash equivalent.
Measuring the three-month period from the balance sheet date.
Students assume maturity is judged at the reporting date.
Fix: Measure the maturity from the date of acquisition of the investment.
Showing transfers between cash and a cash equivalent as an investing outflow.
The movement looks like a purchase of an investment.
Fix: Such movements are part of cash management and are not cash flows.
Classifying equity shares of another company as cash equivalents.
Listed shares are liquid, so students assume they qualify.
Fix: Equity investments are normally excluded because their value risk is not insignificant, so treat them as investing items.
Classifying activities by the ledger heading instead of the nature of the flow.
Students rely on account names.
Fix: Use the definitions: principal revenue-producing activities, long-term assets and other investments, or equity and borrowings.

Worked examples

Example 1

At 31 March 2027, Zenith Ltd (an Ind AS company) has: cash on hand ₹2,00,000; current account balance ₹8,00,000; a treasury bill bought on 15 February 2027 maturing on 15 May 2027 with ₹5,00,000 and insignificant value risk; a fixed deposit of ₹10,00,000 placed on 1 January 2027 for 12 months; and a bank overdraft of ₹3,00,000 repayable on demand that fluctuates and is used in day-to-day cash management. Compute cash and cash equivalents.

Show the solution

Cash on hand ₹2,00,000 and the current account ₹8,00,000 are cash (cash on hand and demand deposits). Total ₹10,00,000.
Treasury bill: acquired 15 February 2027 and matures 15 May 2027, so original maturity is three months. It is short-term, highly liquid and has insignificant value risk. It is a cash equivalent of ₹5,00,000.
Fixed deposit: original maturity is 12 months from acquisition, so it is not a cash equivalent. It is an investing item and is excluded.
Overdraft: it is repayable on demand and forms an integral part of cash management, so it is included as a negative component of cash and cash equivalents.
Cash and cash equivalents = ₹10,00,000 + ₹5,00,000 − ₹3,00,000 = ₹12,00,000.

Answer: Cash and cash equivalents are ₹12,00,000. The fixed deposit is excluded as it is an investing item.

Example 2

Meera Ltd, an Ind AS company, had these items in the year: (a) proceeds from sale of its own goods ₹40,00,000; (b) purchase of a machine ₹12,00,000; (c) proceeds from issue of equity shares ₹20,00,000; (d) repayment of a long-term term loan ₹6,00,000; (e) it moved ₹4,00,000 from its current account into a treasury bill with an original maturity of two months. Classify each item and state the net effect on cash and cash equivalents.

Show the solution

(a) Sale of goods is a principal revenue-producing activity, so it is an operating inflow of ₹40,00,000.
(b) Purchase of a machine is an acquisition of a long-term asset, so it is an investing outflow of ₹12,00,000.
(c) Issue of equity shares changes contributed equity, so it is a financing inflow of ₹20,00,000.
(d) Repayment of a long-term loan changes borrowings, so it is a financing outflow of ₹6,00,000.
(e) The treasury bill has an original maturity of two months and is a cash equivalent. Moving cash into it is a movement within cash and cash equivalents and is not a cash flow. It is ignored.
Net effect = ₹40,00,000 − ₹12,00,000 + ₹20,00,000 − ₹6,00,000 = ₹42,00,000 increase.

Answer: (a) operating inflow; (b) investing outflow; (c) financing inflow; (d) financing outflow; (e) not a cash flow. Net increase in cash and cash equivalents is ₹42,00,000, on the assumption that these are the only items.

Exam tips

Write the full definition of cash equivalents and then test each item against it. Marks are given for stating the conditions.
In case-scenario MCQs, look for the maturity at the date of acquisition and for the words repayable on demand and integral to cash management in an overdraft.
Do not leave out the purpose test: cash equivalents are held for short-term commitments, not for investment.
Use the provision-facts-conclusion layout in written answers, with one short line for each item.
Remember the objective and scope in a line: information about historical changes in cash and cash equivalents, classified into operating, investing and financing activities, for Ind AS entities.

Practice questions from Ind AS 7 Statement of Cash Flows

Objective, Scope and Key Definitions of Ind AS 7 in other exams

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

CMA IntermediateIntroduction to Cash Flow Statement (AS 3 / Ind AS 7)

Objective, Scope and Key Definitions of Ind AS 7: frequently asked questions

What are cash equivalents under Ind AS 7?

They are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. They are held to meet short-term cash commitments. An investment normally qualifies only when its original maturity is three months or less from acquisition.

How is a bank overdraft treated under Ind AS 7?

If the overdraft is repayable on demand and forms an integral part of the entity's cash management, it is included in cash and cash equivalents as a negative component. If it does not meet these conditions, it is treated as a borrowing and falls under financing activities.

What is the objective of Ind AS 7?

The objective is to require information about the historical changes in cash and cash equivalents of an entity. It does this through a statement that classifies cash flows into operating, investing and financing activities.

Are movements between cash and cash equivalents shown in the cash flow statement?

No. Cash flows exclude movements between items that make up cash and cash equivalents, because these are part of cash management and not operating, investing or financing activities.