CMA Intermediate · Corporate Accounting and Auditing
Cash Flow Statement for CMA Intermediate: AS 3 and Ind AS 7
A cash flow statement reports the cash and cash equivalents that came in and went out during a period, classified into operating, investing and financing activities. To solve a question, start with profit, adjust for non-cash items and working capital changes, then add investing and financing flows to reconcile opening and closing cash.
What this chapter covers
This chapter teaches you to build a cash flow statement from a balance sheet, a statement of profit and loss and some notes. AS 3 and Ind AS 7 both require cash flows during the period to be classified into operating, investing and financing activities. Paragraph 8 of AS 3 states this directly. Both standards say the classification should be the one most appropriate to the business.
The core skill is the indirect method. You start with profit or loss and adjust it for changes in inventories and operating receivables and payables, for non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign exchange gains and losses, and for items whose cash effects are investing or financing flows. The direct method shows gross cash receipts and payments. Ind AS 7 encourages it. AS 3 calls it more appropriate. In practice, numerical questions mostly use the indirect method.
The chapter links to the rest of Paper 10 through company financial statements prepared in Schedule III format. If you can read a balance sheet and a profit and loss statement, you can derive cash flows from them. The same skill supports financial analysis in Paper 11 and Paper 12. Under AS 3, a one person company, a small company and a dormant company may have financial statements without a cash flow statement. Know this for theory questions.
Cash flow statement is a numerical chapter, and numericals reward method. If you follow a fixed layout, you earn step marks even when one figure goes wrong. The chapter also gives you a theory base: definitions of operating and financing activities, the direct versus indirect method, and non-cash transactions. These can appear as short notes or as MCQs in the compulsory Section A. Once the format is automatic, the chapter becomes a dependable scoring area for the descriptive questions and a quick source of MCQ marks.
Cash Flow Statement: topics in the order to study them
- 1Introduction to Cash Flow Statement (AS 3 / Ind AS 7)Learn the purpose, who must prepare it, and the two standards first, so the rest of the chapter has a frame.
- 2Classification of Cash Flow ActivitiesEvery figure you compute must land in operating, investing or financing, so master the definitions before any numerical.
- 3Cash Flow from Operating ActivitiesThis is the longest and most error-prone section, and it carries the indirect method that all full questions use.
- 4Cash Flow from Investing and Financing ActivitiesThese sections follow operating activities and mostly need ledger-style working for assets, investments, share capital and borrowings.
- 5Preparing Cash Flow Statement from Financial StatementsNow combine all three sections into one full statement and reconcile to closing cash and cash equivalents.
- 6Special Items and Adjustments in Cash Flow StatementStudy the awkward items last, such as non-cash transactions, tax, dividends and provisions, once the base method is secure.
How to prepare Cash Flow Statement
Treat this chapter as a method to practise, not a set of facts to memorise. Build the layout first, then speed.
- Read the definitions of operating, investing and financing activities and write each in your own words. Operating activities are the principal revenue-producing activities and other activities that are not investing or financing.
- Learn the indirect method layout: profit, then non-cash adjustments, then working capital changes, then cash generated from operations, then tax.
- Practise the direction rule for working capital: an increase in inventory or receivables reduces cash, and an increase in payables raises cash. Test it on small examples until it is automatic.
- Do investing and financing sections using working notes. Reconstruct fixed asset, investment, share capital and loan accounts to find the cash figure.
- Solve at least one full question each day from financial statements with adjustments. Always end by agreeing your net cash change to the change in cash and cash equivalents.
- Revise theory points for short notes: direct versus indirect method, non-cash transactions, and exemptions. Attempt MCQs on classification and direction of adjustments.
Common mistakes in Cash Flow Statement
Getting the sign wrong on working capital changes
Fix: Ask whether cash was tied up or released. More money locked in stock or debtors means less cash. More credit from creditors means more cash.
Leaving profit or loss on sale of assets inside operating activities
Fix: Reverse it in the operating adjustments and show the full sale proceeds under investing activities.
Showing non-cash transactions in the statement
Fix: Exclude transactions needing no cash or cash equivalents, such as assets acquired by issuing shares, and disclose them separately.
Skipping working notes
Fix: Write short ledger accounts for fixed assets, investments, capital and loans. A wrong final figure still earns step marks if the working is visible.
Not reconciling to closing cash and cash equivalents
Fix: Add the net change to opening cash and cash equivalents and agree to the balance sheet. A mismatch shows an error to hunt down.
Mixing up AS 3 and Ind AS 7 in theory answers
Fix: Remember that both use the same three classifications. Note the small differences, such as Ind AS 7 listing undistributed profits of associates among non-cash items.
Last-day revision: Cash Flow Statement
- Cash flows are classified into operating, investing and financing activities.
- Operating activities are 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.
- Indirect method starts with profit or loss and adjusts for non-cash items, working capital changes and investing or financing items.
- Add back non-cash expenses such as depreciation and provisions; remove non-cash gains.
- Increase in inventories or receivables lowers operating cash; increase in payables raises it.
- Remove profit or loss on sale of assets from operating activities and show the sale proceeds under investing.
- Investing and financing transactions that need no cash or cash equivalents are excluded and disclosed elsewhere.
- Direct method shows gross cash receipts and payments; Ind AS 7 encourages it.
- Under AS 3, one person, small and dormant companies may omit the cash flow statement.
- Your statement must reconcile to the change in cash and cash equivalents.
Cash Flow Statement practice questions
- Which statement best reflects the Ind AS 7 principle on how an entity should present its operating, investing and financing cash flows?
- Sundaram Machines Ltd acquired a machine on deferred payment terms. An instalment paid during the year includes both interest and the princi…
- Sundaram Ltd acquired machinery on deferred payment terms. The instalment paid during the year was ₹5,00,000, comprising ₹4,20,000 towards t…
- Kaveri Ltd's share capital rose from ₹20,00,000 to ₹26,00,000 during the year. ₹1,50,000 of the increase was bonus shares issued out of gene…
- Under the indirect method of reporting cash flows from operating activities as set out in Ind AS 7, which of the following is an adjustment …
- Meghna Ltd's plant (cost ₹12,00,000, accumulated depreciation ₹7,00,000) was sold at a loss of ₹60,000. The opening and closing gross block …
- Under the indirect method, net cash flow from operating activities is found by adjusting profit or loss for certain effects. Which of the fo…
- Gulmohar Ltd's plant and machinery (at cost) was ₹20,00,000 at the start and ₹24,00,000 at the end of the year. Accumulated depreciation was…
Cash Flow Statement in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Cash Flow Statement: frequently asked questions
Which method should I use in the CMA Inter exam, direct or indirect?
For operating activities in numerical questions, use the indirect method unless the question asks otherwise. Know the direct method for theory, because both standards describe it as providing useful information about gross cash receipts and payments.
What is the difference between operating, investing and financing activities?
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. Investing activities cover the rest, such as buying and selling long-term assets and investments.
Do all companies have to prepare a cash flow statement?
Financial statements under the Companies Act, 2013 include a cash flow statement. However, a one person company, small company and dormant company may have financial statements without one, as noted in AS 3.
How do I treat non-cash transactions?
Exclude investing and financing transactions that do not use cash or cash equivalents from the statement. Disclose them elsewhere in the financial statements with all relevant information, as paragraph 40 of AS 3 requires.