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CMA Intermediate · Financial Management and Business Data Analytics

Cash Flow Statement: Preparation and Analysis for CMA Inter

A cash flow statement shows how a company's cash and cash equivalents changed during a period, split into operating, investing and financing activities. To solve it, start from profit, adjust for non-cash and non-operating 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 profit and loss account and a few notes. It follows AS 3 / Ind AS 7, which require cash flows to be grouped under operating, investing and financing activities. You learn the direct and indirect methods, but numerical questions mostly use the indirect method.

The chapter is mechanical once you see the pattern. Every balance sheet change has a cash effect, and your job is to place that effect in the right section. Fixed asset schedules, investments, share capital, borrowings, dividends, interest and tax all feed into it.

It connects closely to the rest of Paper 11. Financial statement analysis and ratios use the same statements, and working capital management uses the same current asset and liability movements. Analysis of cash flows also supports the discussion of liquidity, funding and dividend decisions. In the exam, expect one numerical question to prepare the statement, along with MCQs and short theory on classification.

This chapter is worth marks because it is highly scoring and rule-based. A full numerical can be solved with a fixed layout, and examiners give step marks for each correct working note and each section total, even if the final figure slips. The same classification rules are also tested as quick MCQs, so one chapter helps you in both Section A and the written section. It also strengthens your grip on financial statements for every other chapter in the paper.

Cash Flow Statement - Preparation and Analysis: topics in the order to study them

  1. 1Cash Flow Statement Basics and AS 3 / Ind AS 7You need the purpose, the meaning of cash and cash equivalents, and the standard's scope before any classification makes sense.
  2. 2Classification of Cash Flows: Operating, Investing, FinancingEvery later calculation depends on placing each item in the right section, so learn the classification rules first.
  3. 3Cash Flow from Operating Activities: Direct and Indirect MethodThis is the largest and most tested part, and it introduces the adjustments for non-cash items and working capital changes.
  4. 4Cash Flows from Investing and Financing ActivitiesThese sections need fixed asset, investment, capital and borrowing workings, which are simpler once operating cash flow is clear.
  5. 5Preparing a Complete Cash Flow Statement from Financial StatementsNow you combine all three sections, work through full problems and reconcile to closing cash.
  6. 6Analysis and Interpretation of Cash Flow StatementInterpretation makes sense only after you can prepare the statement, and it is used for short comment-type answers.

How to prepare Cash Flow Statement - Preparation and Analysis

Treat this chapter as a procedure you can repeat. Practise the layout until it is automatic, then spend your time on tricky adjustments.

  1. Learn the three headings and the definition of cash and cash equivalents, then write the standard layout from memory.
  2. Make a list of items by section: for example interest paid, dividends paid, purchase of fixed assets, issue of shares and repayment of loans, and note where each goes under your own policy for interest and dividends as the question states.
  3. Practise the indirect method: start with net profit before tax and extraordinary items, add back non-cash and non-operating items, then adjust for changes in current assets and current liabilities.
  4. Build working notes for fixed assets, accumulated depreciation, investments and reserves so that sale proceeds, purchases and profit or loss on sale come out clearly.
  5. Solve full problems with two balance sheets and additional information. Always end by checking that net change in cash equals closing cash minus opening cash.
  6. Write short answers on analysis, such as what a positive operating cash flow with large investing outflow suggests, and practise the MCQs on classification in a timed set.

Common mistakes in Cash Flow Statement - Preparation and Analysis

  • Adding back depreciation but ignoring profit or loss on sale of assets

    Fix: List all non-cash and non-operating items in the profit adjustment, and show the actual sale proceeds under investing activities.

  • Getting the sign of working capital changes wrong

    Fix: Use the rule that an increase in current assets uses cash and an increase in current liabilities provides cash, and write the sign beside each line.

  • Placing items in the wrong section

    Fix: Follow the question's instructions and the standard's classification, and keep a written list of each item with its section.

  • Showing non-cash transactions as cash flows

    Fix: Check whether cash actually moved. Exclude non-cash items from the statement and mention them in a note if required.

  • Skipping working notes

    Fix: Prepare fixed asset, provision and reserve accounts first. Working notes earn step marks even when the final answer is wrong.

  • Not reconciling to closing cash

    Fix: Always compute net change in cash and add opening cash to agree with the balance sheet. A mismatch signals an error to hunt.

Last-day revision: Cash Flow Statement - Preparation and Analysis

  • Cash flow statement groups flows into operating, investing and financing activities under AS 3 / Ind AS 7.
  • Cash equivalents are short-term, highly liquid investments that are readily convertible to known cash amounts with insignificant risk of value change.
  • Indirect method starts from profit and adjusts for non-cash items, non-operating items and working capital changes.
  • Add back depreciation and amortisation. Add back losses and deduct gains on sale of assets; show the actual sale proceeds under investing activities.
  • An increase in current assets reduces cash; an increase in current liabilities increases cash.
  • Purchase and sale of fixed assets and investments are investing flows, and sale is taken at proceeds, not book value.
  • Issue of shares, debentures and loans, and their repayment, are financing flows.
  • Bonus shares and conversion of debentures into shares involve no cash, so they are not shown as flows.
  • Income tax paid is normally shown under operating activities unless it is clearly linked to investing or financing.
  • For non-financial companies under AS 3, interest and dividends paid are financing; interest and dividends received are investing. Ind AS 7 allows a choice of classification, which must be applied consistently.
  • Net increase or decrease in cash plus opening cash must equal closing cash.
  • Positive operating cash flow over time indicates a business that funds itself from its core activity.

Cash Flow Statement - Preparation and Analysis practice questions

Cash Flow Statement - Preparation and Analysis 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 - Preparation and Analysis: frequently asked questions

Which method should I use in the exam, direct or indirect?

Use the method the question asks for. If it gives a balance sheet and profit and loss data, the indirect method is the usual choice. Know the direct method layout too, since theory questions can ask you to compare them.

Is interest paid an operating or financing cash flow?

For a non-financial company under AS 3, interest paid is a financing cash flow, and interest and dividends received are investing. Ind AS 7 allows a choice of classification, applied consistently. If the question gives an instruction, follow it and state your treatment clearly.

How do I score full marks in a cash flow numerical?

Prepare clear working notes, use the standard layout, show each section total and reconcile to closing cash. This earns step marks even if one small figure is wrong.

Are there MCQs from this chapter?

Yes. Section A has 15 standalone MCQs of 2 marks each across the paper, and classification of cash flows and treatment of items are easy topics for such questions. There is no negative marking.