CS Executive · Corporate Accounting and Financial Management
Cash Flows for CS Executive: Chapter Guide
A cash flow statement reports the cash flows of a period, classified into operating, investing and financing activities, as required by AS 3 and Ind AS 7. To solve a problem, start from profit, adjust non-cash items and working capital for operating cash, then classify the remaining flows.
What this chapter covers
This chapter in Paper 4, Part I (Corporate Accounting) teaches you to build a cash flow statement from a balance sheet and a statement of profit and loss. Profit does not show how cash moved. The statement does. It tells a reader where cash came from and where it went during the period.
Both AS 3 and Ind AS 7 say the statement must report cash flows during the period classified by operating, investing and financing activities. The two standards follow the same structure. Ind AS 7 uses "entity" and "profit or loss". AS 3 uses "enterprise" and "net profit or loss". Learn the common structure first, then note the small wording differences.
The chapter links to the rest of the paper. You need depreciation, provisions, share capital, debentures and fixed assets from your earlier accounting chapters. You also need the working capital ideas from Financial Management in Part II. A clean cash flow statement is a good test of whether you can read financial statements as a whole.
Cash flow statements are a standard practical question in a written accounting paper. Marks depend on method, so a student who follows the steps can score well even if the numbers are large. The chapter has a fixed format and a fixed set of adjustments. That makes it one of the more predictable chapters to prepare. It also repays practice, because one error in a working note usually carries into the final answer, and neat workings protect your partial marks.
Cash Flows: topics in the order to study them
- 1Cash Flow Statement: Meaning and ObjectivesStart here to learn what the statement is for and why profit and cash differ, before any classification rules.
- 2AS 3 / Ind AS 7: Classification of Cash FlowsEvery problem begins by sorting items into operating, investing and financing, so learn the definitions next.
- 3Cash Flow from Operating ActivitiesThis is the longest part of any problem, and it uses the indirect method adjustments you must know cold.
- 4Cash Flow from Investing and Financing ActivitiesOnce operating is clear, the remaining two sections are shorter and follow from balance sheet changes.
- 5Preparing a Cash Flow Statement: Practical ProblemsFinish with full problems, which combine all the rules and train you for the exam format.
How to prepare Cash Flows
Treat this chapter as a method to be practised, not a set of facts to be memorised. Spend most of your time on solved problems.
- Read the definitions of operating, investing and financing activities in AS 3 and Ind AS 7. 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 (owners' capital under AS 3) and borrowings.
- Learn the indirect method for operating cash flow: start with profit, then adjust for non-cash items, for items whose cash effect is investing or financing, and for changes in inventories and operating receivables and payables.
- Make a fixed layout on paper: operating, investing, financing, net change, opening cash, closing cash. Use the same layout every time.
- Build working notes before the statement: fixed assets and depreciation, tax, dividend and borrowings. Do the working notes first and then transfer totals.
- Solve problems from a given pair of balance sheets with extra information. Check that your closing cash and cash equivalents agree with the balance sheet.
- Revise the difference in wording between AS 3 and Ind AS 7, and write answers showing each step so the examiner can follow your logic.
Common mistakes in Cash Flows
Starting operating cash flow from the wrong profit figure
Fix: Read what the question gives and state your starting point clearly. Adjust for tax and other items that need separate treatment.
Forgetting to add back non-cash items or adding back items twice
Fix: List all non-cash items in a working note and tick each one as you use it.
Wrong sign on working capital changes
Fix: Ask one question for each item: did this change use cash or release cash? Then write the sign.
Leaving profit-linked investing and financing items inside operating cash flow
Fix: Remove such items in the operating section and show the actual cash in investing or financing.
Showing net figures where gross figures are needed
Fix: Rebuild the account with a working note so that gross receipts and payments are reported separately.
Not reconciling to closing cash
Fix: Always add the net change to opening cash and compare with the balance sheet. A mismatch tells you where to look.
Last-day revision: Cash Flows
- The statement reports cash flows during the period, classified as operating, investing and financing.
- 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.
- Under the indirect method, start with profit or loss and adjust it.
- Adjust for non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign currency gains and losses.
- Adjust for changes in inventories and operating receivables and payables.
- Remove items whose cash effects are investing or financing cash flows.
- Report major classes of gross receipts and gross payments separately for investing and financing activities, except where net reporting is allowed.
- Classify each flow in the way most appropriate to the business.
- Net change in cash plus opening balance must equal closing cash and cash equivalents.
- Show every working note so you earn marks for method.
Cash Flows practice questions
- Which item is classified as cash under AS 3 Cash Flow Statements?
- Meera Ltd purchased plant for ₹3,00,000 in cash and sold old plant (book value ₹50,000) for ₹60,000 cash. Which statement gives the correct …
- Ind AS 7 states that an entity presents cash flows from operating, investing and financing activities in a manner most appropriate to its bu…
- As defined in AS 3 and Ind AS 7, 'cash flows' are:
- Sundaram Traders Ltd reported net profit before tax of ₹5,00,000 after charging depreciation of ₹80,000 and after crediting profit on sale o…
- Which of the following is a non-cash item that is adjusted to net profit when determining cash flow from operating activities under the indi…
- Ind AS 7 states that historical cash flow information is useful in examining which relationship, in addition to checking the accuracy of pas…
- Sunrise Textiles Ltd (AS 3) issued 50,000 equity shares of Rs 10 each at a premium of Rs 5 per share, fully received in cash. It also repaid…
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.
Cash Flows: frequently asked questions
Is the cash flow statement asked in the CS Executive paper?
It is part of Paper 4, Part I (Corporate Accounting), which is a written paper. Expect to explain the standard and to solve a practical problem, so prepare both.
What is the difference between AS 3 and Ind AS 7?
Both require cash flows to be classified into operating, investing and financing activities. The wording differs slightly. For example, AS 3 refers to owners' capital, including preference share capital for a company, while Ind AS 7 refers to contributed equity. Check which standard the question asks for.
What is the indirect method?
It starts from profit or loss and adjusts it for non-cash items, for changes in inventories and operating receivables and payables, and for items whose cash effects are investing or financing. The result is net cash flow from operating activities.
How should I practise this chapter?
Solve full problems with the same layout each time. Do working notes first, then the statement, then check closing cash against the balance sheet.