Corporate Accounting and Auditing · Cash Flow Statement

Special Items and Adjustments in Cash Flow Statement

Updated 10 October 2026 · Fact-checked

Special items are entries that distort a cash flow statement if you take them straight from the profit figure. Add back non-cash items, move gains or losses on asset sales to investing activities, exclude non-cash transactions such as bonus shares, and show only cash actually paid for tax, interest and dividend.

Understand Special Items and Adjustments in Cash Flow Statement

A cash flow statement reports only movements of cash and cash equivalents. Profit is calculated on the accrual basis, so it contains items that never touched cash. It also contains items whose cash effect belongs in another section. The special adjustments exist to fix these two problems.

The first problem is non-cash items. Under the indirect method, you start with profit and adjust for the effects of changes in inventories, receivables and payables, non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign exchange gains and losses, and all other items whose cash effects are investing or financing cash flows (para 20 of AS 3 and Ind AS 7).

The second problem is misclassified items. A sale of plant may give a gain or loss in the profit and loss account. But the cash flow from that sale is an investing cash flow (AS 3 para 13). So you remove the gain or loss from operating profit, and show the full sale proceeds under investing activities.

Then there are non-cash transactions. Many investing and financing activities do not directly affect current cash flows, although they change the capital and asset structure. Examples are acquiring assets by assuming directly related liabilities (Ind AS 7 also adds by means of a lease), acquiring an entity by issuing shares, and converting debt into equity. These transactions are excluded from the statement and disclosed elsewhere in the financial statements with all relevant information (AS 3 para 40-41; Ind AS 7 para 43-44). Issue of bonus shares fits the same logic: it only moves a reserve to share capital, so no cash moves.

Finally, tax is treated by cash paid. The provision for tax in the profit and loss account is not the cash paid. Under the usual exam approach, you start with profit before tax, and then deduct tax actually paid, found by working out the provision account. Under AS 3, cash flows of an extraordinary item are shown separately under operating, investing or financing, as appropriate (para 29). Foreign currency cash flows are recorded at the exchange rate on the date of the cash flow. Ind AS 7 allows an approximate rate, such as a weighted average, but not the closing rate for a foreign subsidiary's cash flows (para 25 and 27).

Key rules to remember

Tax paid (provision account): Tax paid = Opening provision for tax + Tax charged to P&L − Closing provision for tax; Use when the provision is a separate balance sheet item. Prepare it as a T-account to avoid errors.
Gain on sale of asset: Gain or loss = Sale proceeds − Book value (WDV) of asset sold; Deduct a gain from, or add a loss to, operating profit. Show the full sale proceeds under investing activities.
Book value of asset sold: WDV of asset sold = Opening WDV + Purchases − Depreciation − Closing WDV; Gives the book value of disposals when the purchase and depreciation are known. Use gross block and accumulated depreciation accounts if given.
Provisions: Add back the charge for provision to profit before tax, and treat the change in operating provisions as a working capital item as the question directs; A provision is non-cash when created. The cash effect appears when it is actually paid.
Non-cash transactions: Bonus shares, conversion of debt to equity, assets acquired for shares: exclude from cash flows and disclose; Only the cash part of a mixed transaction is shown.

How to solve Special Items and Adjustments in Cash Flow Statement questions

Use the same sequence on every question with special items. Work from the balance sheet changes and the notes, and keep a separate working for each adjustment.

1Identify every item in the additional information and label it: operating, investing, financing, or non-cash.
2Prepare the provision for tax account (or tax payable account) and find tax actually paid.
3Start from profit before tax and tax, and add back non-cash charges such as depreciation, provisions, and unrealised forex loss; deduct non-cash gains.
4Remove gains and losses on sale of assets, and also interest and dividend income or expense if you will show them in investing or financing.
5Prepare asset accounts (and accumulated depreciation) to find the book value of assets sold, then compute purchases and sale proceeds.
6Check each change in share capital and reserves. If the issue is by bonus or by conversion of debt or in exchange for assets, leave it out of cash flows and disclose it.
7Compute cash paid for tax, interest and dividends as per the standard and as the question directs, and place each item in its section.
8Total the three sections and agree the net change with the change in cash and cash equivalents in the balance sheet.

Quickest way: Three-column tick method

When to use it: Use when you have limited time and a long list of adjustments with many balance sheet items.

Write each adjustment in the margin with one letter: O (operating), I (investing), F (financing), N (non-cash).
For every N, strike it out of the cash flows and note it for disclosure.
For tax, write the provision T-account first. The balancing figure is tax paid.
For asset sales, write sale proceeds, then back out the gain or loss in operating profit.
Add the three sections last and verify with opening and closing cash.

Common mistakes in Special Items and Adjustments in Cash Flow Statement

Deducting the tax provision from profit as if it were tax paid.
The profit and loss account shows tax as one number and students assume it was paid in full.
Fix: Always draw the provision account. Opening + charge − closing = cash paid.
Showing bonus shares as a financing inflow.
Share capital increases in the balance sheet, so it looks like cash was raised.
Fix: Bonus shares are made out of reserves with no cash. Exclude them and disclose if needed.
Leaving the gain on sale of asset in operating profit and also showing proceeds in investing.
Students forget that the gain is already within profit, so cash is counted twice.
Fix: Deduct the gain (or add the loss) in the operating adjustments, and show the full proceeds under investing.
Showing only the gain or loss as the investing cash flow.
Students confuse the profit effect with the cash effect.
Fix: Investing cash flow is the sale proceeds, not the gain or loss.
Treating a provision as a cash outflow when it is created.
The charge reduces profit, so it feels like money was spent.
Fix: Add back the charge as non-cash. Show cash only when the provision is paid or settled.
Using the closing exchange rate for all foreign cash flows.
It is the rate on the balance sheet and is easy to find.
Fix: Use the rate at the date of the cash flow, or an approximate rate such as a weighted average where allowed. Do not use the closing rate for a foreign subsidiary's cash flows under Ind AS 7.

Worked examples

Example 1

From the books of Kaveri Ltd: Provision for tax on 1 April 2026 was ₹2,40,000 and on 31 March 2027 was ₹3,10,000. Tax charged to the profit and loss account for the year was ₹4,50,000. Profit before tax was ₹14,00,000. Find the tax paid and the cash generated from operations if working capital changes are nil and depreciation is ₹1,50,000.

Show the solution

Tax paid = Opening provision + charge − closing provision.
Tax paid = ₹2,40,000 + ₹4,50,000 − ₹3,10,000 = ₹3,80,000.
Operating profit before working capital changes = ₹14,00,000 + ₹1,50,000 = ₹15,50,000.
With no working capital changes, cash generated from operations = ₹15,50,000.
Less: tax paid ₹3,80,000, so net cash from operating activities = ₹11,70,000.

Answer: Tax paid is ₹3,80,000. Net cash from operating activities is ₹11,70,000.

Example 2

Sagar Ltd sold a machine with a book value of ₹1,80,000 for ₹2,10,000 in cash. During the year it also issued bonus shares of ₹5,00,000 out of general reserve. Profit before tax was ₹6,00,000, which includes the gain on sale. Depreciation charged was ₹90,000. Show the effect on the cash flow statement.

Show the solution

Gain on sale = ₹2,10,000 − ₹1,80,000 = ₹30,000.
Operating profit before working capital changes = ₹6,00,000 + ₹90,000 − ₹30,000 = ₹6,60,000.
Investing activity: proceeds from sale of machine = ₹2,10,000 inflow.
Bonus shares of ₹5,00,000 are a transfer from reserve to share capital with no cash, so exclude them from the statement.
Disclose the bonus issue elsewhere in the financial statements.

Answer: Operating profit before working capital changes is ₹6,60,000. Investing inflow is ₹2,10,000. The bonus issue of ₹5,00,000 is excluded from cash flows and disclosed.

Exam tips

In written answers, show the tax provision account and the asset accounts as working notes. They carry step marks even if the final figure is wrong.
In MCQs, ask first whether cash actually moved. Bonus shares, conversion of debentures and assets acquired for shares are never cash flows.
Check whether the question asks for AS 3 or Ind AS 7. Ind AS 7 names leases and undistributed profits of associates in its examples, and has its own foreign currency rules.
If an extraordinary item is given in an AS 3 question, show its cash flow separately in the section it belongs to.
Always reconcile the closing total with opening and closing cash and cash equivalents.

Practice questions from Cash Flow Statement

Special Items and Adjustments in 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.

Special Items and Adjustments in Cash Flow Statement: frequently asked questions

How is provision for tax treated in a cash flow statement?

The provision is not the cash paid. Prepare the provision account and find tax paid as opening provision plus charge for the year less closing provision. Show tax paid as an outflow in operating activities unless the question says otherwise.

Are bonus shares shown in the cash flow statement?

No. Bonus shares are issued from reserves and no cash comes in or goes out. They are a non-cash transaction, excluded from the statement and disclosed elsewhere in the financial statements.

What are non-cash transactions in a cash flow statement?

They are investing and financing transactions that need no cash or cash equivalents. Examples in the standards include acquiring assets by assuming related liabilities, acquiring an entity by issuing shares, and converting debt to equity. They are excluded and disclosed elsewhere.

How do I treat gain or loss on sale of an asset?

Remove it from operating profit by deducting a gain or adding back a loss. Then show the full sale proceeds under investing activities, because the cash flow from the sale is an investing flow.