What Is a Cash Flow Statement? Format, Methods and a Worked Example (2026)

Profit tells you whether the business made money. The cash flow statement tells you whether it has money — and why the bank balance went up or down. This guide is for owners, finance staff and students in India who want to read or prepare one: you'll get the meaning, how AS 3 and Ind AS 7 classify every rupee into operating, investing and financing activities, the direct and indirect methods worked through on the same ₹ example, which businesses must prepare a cash flow statement and which are exempt, and the reasons a profitable firm can still run out of cash. Rules were checked against the Companies Act, 2013 and ICAI standards in October 2026.

Quick answer

A cash flow statement reports the cash that came into and went out of a business during a period, grouped into operating, investing and financing activities, and reconciles opening cash with closing cash. In India it follows AS 3 (or Ind AS 7 for Ind AS companies). Companies must include it in their financial statements, except one person companies, small companies, dormant companies and start-up private companies.

• Operating: cash from customers, payments to suppliers and staff, income tax

• Investing: buying or selling machinery, property and investments; interest received

• Financing: loans taken and repaid, capital raised, interest and dividends paid

• Indirect method starts from profit before tax; direct method lists receipts and payments

• Cash equivalents: investments maturing in about three months or less

What is a cash flow statement? Meaning and purpose

A cash flow statement is a summary of every inflow and outflow of cash and cash equivalents over an accounting period — usually the financial year from April to March. Where the balance sheet is a snapshot on one date and the profit and loss account measures performance on an accrual basis, the cash flow statement shows the movement of actual money between two balance sheet dates.

It answers questions the other two statements can't. Did the business generate cash from its own operations, or did it survive on loans? How much did it spend on new machinery? Did it repay debt or borrow more? Could it pay a dividend out of operating cash? A banker uses the answers to judge whether loan instalments can be serviced; an investor uses them to test whether reported profit is turning into money.

Under section 2(40) of the Companies Act, 2013, the cash flow statement is one of the components of a company's financial statements, alongside the balance sheet, the profit and loss account, the statement of changes in equity where applicable, and the notes. It is prepared under AS 3, Cash Flow Statements for companies following the Accounting Standards, and under Ind AS 7, Statement of Cash Flows for companies on Ind AS.

The three activities: operating, investing and financing

AS 3 requires every cash flow to be classified into one of three activities, so readers can see how cash was generated and used.

Operating activities are the principal revenue-producing activities of the business and anything that isn't investing or financing. Typical items: cash received from customers, cash paid to suppliers and employees, rent, electricity, and income tax paid — AS 3 places taxes in operating activities unless they can be specifically linked to an investing or financing transaction.

Investing activities are the acquisition and disposal of long-term assets and of investments that aren't cash equivalents. Buying a CNC machine, selling an old delivery van, placing a one-year fixed deposit, buying shares in another company, and — for a business that isn't a financial institution — interest and dividends received.

Financing activities change the size and composition of the owners' capital and the business's borrowings. Issuing shares, taking a term loan, repaying a loan, drawing or repaying a cash credit (where the company treats it as borrowing), paying interest and paying dividends. For a proprietor or partnership, capital introduced and drawings sit here too.

The classification of interest matters more than it looks. Internationally, IAS 7 gives businesses a choice for interest; ICAI's Board of Studies material on Ind AS 7 shows that in India, non-financial entities put interest paid in financing and interest received in investing, the same as AS 3. That keeps operating cash flow clean of financing costs, which is how Indian banks compare borrowers.

Transactions that don't involve cash at all — buying a machine on a finance lease, converting a loan into shares, issuing bonus shares — are left out of the statement entirely. AS 3 requires them to be disclosed elsewhere in the financial statements so readers still know they happened.

Cash and cash equivalents

The statement explains the movement in "cash and cash equivalents", so it matters what counts. Cash is cash in hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments that convert to a known amount of cash with insignificant risk of change in value; AS 3 says an investment normally qualifies only when it has a short maturity of, say, three months or less from the date of acquisition. A 90-day fixed deposit or a liquid fund qualifies; a one-year fixed deposit, equity shares and gold do not.

Moving money between your current account and a 60-day deposit isn't a cash flow at all — both are cash and cash equivalents. Placing money in a 13-month deposit, on the other hand, is an investing outflow. The components of cash and cash equivalents must be disclosed and reconciled to the balance sheet figure.

Direct vs indirect method for operating cash flows

AS 3 allows two ways to present operating activities; investing and financing are always shown as gross receipts and payments.

The direct method shows major classes of gross cash receipts and payments: cash received from customers, cash paid to suppliers, cash paid to employees, and so on. AS 3 notes that it provides information that may be useful in estimating future cash flows, which is why the standard encourages it. The indirect method starts with net profit before tax and adjusts it for non-cash items (depreciation, provisions), for items that belong to investing or financing (interest, profit on sale of assets), and for changes in inventories, receivables and payables. Both methods produce the same final figure for net cash from operating activities.

In practice, almost every Indian company and CA firm uses the indirect method, because it can be built from the profit and loss account and two balance sheets without re-analysing the bank book. The direct method is more intuitive for a small business owner — it looks like a summary of the cash book — and it's what most owners build in a spreadsheet when they forecast cash.

Direct vs indirect method

	Direct method	Indirect method
Starts from	Cash receipts and payments	Net profit before tax
Shows	Gross cash from customers, paid to suppliers and staff	Adjustments for non-cash items and working capital changes
Data needed	Cash book / bank analysis	P&L and two balance sheets
Used by	Owners forecasting cash; encouraged by AS 3	Most Indian companies and auditors
Result	Net cash from operating activities	Same figure

Starts from

Direct method

Cash receipts and payments

Indirect method

Net profit before tax

Shows

Direct method

Gross cash from customers, paid to suppliers and staff

Indirect method

Adjustments for non-cash items and working capital changes

Data needed

Direct method

Cash book / bank analysis

Indirect method

P&L and two balance sheets

Used by

Direct method

Owners forecasting cash; encouraged by AS 3

Indirect method

Most Indian companies and auditors

Result

Direct method

Net cash from operating activities

Indirect method

Same figure

Worked example: cash flow statement of a small company

Kaveri Foods Pvt Ltd, a snack manufacturer, reports sales of ₹500 lakh, profit before tax of ₹30 lakh and profit after tax of ₹22 lakh (tax expense ₹8 lakh). During the year it bought a new packaging line for ₹40 lakh, sold an old machine with a book value of ₹3 lakh for ₹5 lakh, took a new term loan of ₹25 lakh, repaid ₹10 lakh of an old one and paid a ₹3 lakh dividend. Here's the statement by the indirect method, in ₹ lakh.

Each adjustment has a reason. Depreciation is added back because it reduced profit without any cash leaving. Interest expense is added back here and shown as paid under financing; interest income and the profit on sale come out of operating and the full sale proceeds of ₹5 lakh go to investing. An increase in stock or receivables means cash is tied up, so it's subtracted; an increase in payables means suppliers are funding you, so it's added. Tax is the amount actually paid (₹7 lakh), not the ₹8 lakh charged in the profit and loss account.

The same operating section by the direct method

Both routes land on ₹22 lakh. The direct version makes one thing obvious that the indirect version hides: a ₹15 lakh jump in money owed by customers meant only ₹485 lakh of the year's ₹500 lakh of sales arrived as cash.

Cash vs profit: reading the result

Kaveri Foods earned ₹22 lakh after tax, yet its cash fell by ₹2 lakh. That isn't a contradiction — it's the whole point of the statement.

Kaveri Foods — profit vs cash

₹22 lakh

Profit after tax

₹22 lakh

Cash from operations

−₹18 lakh

Free cash flow

operating 22 − capex 40

−₹2 lakh

Change in cash

Operating cash of ₹22 lakh matched profit after tax, which is healthy: depreciation added cash, but growth in stock and receivables used almost as much. The business then spent ₹40 lakh on a new line — more than it generated — and bridged the gap with ₹21 lakh of net new borrowing (₹25 lakh loan + ₹6 lakh cash credit − ₹10 lakh repaid), from which it also paid interest and a dividend. Free cash flow (operating cash minus capital expenditure) was negative ₹18 lakh. For a year with a big expansion that's normal; if it repeated every year, the company would be borrowing to stand still.

The general reasons profit and cash diverge are worth memorising. Credit sales are profit today but cash only when collected. Stock bought is cash spent today but expense only when sold. Depreciation and provisions reduce profit with no cash leaving. Loan principal, capital expenditure, drawings and dividends use cash without touching profit. And advance receipts from customers bring cash before any profit is earned. Our working capital guide explains how the operating cycle drives the first two.

Lenders use the operating section heavily. A business whose operating cash flow is consistently below its profit is usually letting receivables or stock pile up; one whose operating cash is negative while profit is positive needs a hard look before any new limit is sanctioned.

Who must prepare a cash flow statement in India

Companies under the Accounting Standards. Every company must include a cash flow statement prepared under AS 3, with four exceptions in section 2(40) and the June 2017 exemption notification: a one person company, a small company, a dormant company, and a private company recognised as a start-up by DPIIT may leave it out. Since 1 December 2025, a small company is a private company (not a holding or subsidiary company) with paid-up capital up to ₹10 crore and turnover in the previous year's profit and loss account up to ₹100 crore. Note that a company that is merely a "Small and Medium Sized Company" under the accounting rules — turnover up to ₹250 crore — gets no relief from AS 3; only the Companies Act categories above do.

Companies on Ind AS. Listed companies and unlisted companies with net worth of ₹250 crore or more, and their group companies, prepare a statement of cash flows under Ind AS 7. Ind AS 7 adds disclosures that AS 3 doesn't have, such as a reconciliation of changes in liabilities arising from financing activities. From annual periods beginning 1 April 2025, it also requires disclosures about supplier finance arrangements — reverse factoring and similar programmes where a bank pays suppliers early and the buyer pays the bank later.

Proprietorships, partnerships, trusts and other non-company entities. ICAI's applicability rules from 1 April 2024 say AS 3 is not mandatory for non-company entities that qualify as MSMEs — broadly, turnover up to ₹250 crore and borrowings up to ₹50 crore, not listed and not a bank or insurer. Larger non-company entities must prepare one. LLPs follow the LLP Act's Statement of Account and Solvency, and ICAI's applicability rules for LLPs are separate.

Being exempt doesn't mean it's useless. A bank assessing a term loan will often ask for a projected cash flow or fund-flow statement as part of CMA data even from a proprietorship, and an exempt small company that voluntarily includes one gives its lender an easier read.

How to prepare a cash flow statement step by step

You need the current and previous year's balance sheets, the current year's profit and loss account, and details of fixed-asset purchases and sales, loans taken and repaid, and tax paid.

Preparing a cash flow statement (indirect method)

1. 1

   Start with profit before tax

   Take net profit before tax and extraordinary items from the profit and loss account.

2. 2

   Adjust for non-cash and non-operating items

   Add back depreciation, amortisation and provisions; add back interest expense; deduct interest and dividend income and profits on sale of assets (add back losses).

3. 3

   Adjust for working capital changes

   Compare each current asset and liability with last year. Deduct increases in inventories, receivables and advances; add increases in payables and other current liabilities. Reverse the signs for decreases.

4. 4

   Deduct income tax actually paid

   Use the cash paid (advance tax, TDS, self-assessment tax), not the tax charge in the P&L. The result is net cash from operating activities.

5. 5

   List investing and financing flows gross

   Show purchases and sales of fixed assets and investments separately, and loans raised and repaid separately — don't net them off.

6. 6

   Reconcile to the balance sheet

   Opening cash + net change must equal closing cash and cash equivalents in the balance sheet. If it doesn't, an item has been missed or double-counted.

Common mistakes in cash flow statements

Netting loans. Showing "net increase in term loans ₹15 lakh" instead of ₹25 lakh raised and ₹10 lakh repaid hides information AS 3 requires to be shown gross.

Using tax expense instead of tax paid. The ₹8 lakh charge and the ₹7 lakh payment differ by the change in tax provision; using the charge throws the reconciliation off.

Leaving interest in operating activities. For a non-financial business in India, interest paid belongs in financing under both AS 3 and Ind AS 7. Leaving it in operating understates operating cash flow and makes year-on-year comparisons misleading.

Treating fixed deposits as cash. A deposit with an original maturity beyond about three months is an investment, so placing or encashing it is an investing flow. Classifying it as cash inflates closing cash.

Including non-cash transactions. Machinery bought on credit from the supplier, or a loan converted to equity, should be disclosed in the notes, not shown as a cash outflow and inflow.

Showing the full sale price of an asset in operating. Deduct the profit on sale from operating activities and show the whole sale proceeds under investing. Doing only one of the two double-counts the profit.

Official links

• AS 3, Cash Flow Statements (ICAI)Full text of the standard
• Applicability of Accounting Standards (ICAI)Which companies and entities must apply AS 3
• Companies Act, 2013 (India Code)Section 2(40) — financial statement and exemptions
• MCA portalFiling financial statements (AOC-4)

What to do next

Take last year's accounts and build the operating section by the indirect method — profit before tax, add depreciation and interest, adjust for stock, debtors and creditors. If operating cash is well below profit, your receivables or stock are the likely cause, and our working capital guide shows how to shorten the cycle. To understand the two balance sheets the statement sits between, read our balance sheet guide, and if you're preparing for a loan, see the MSME loan guide.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is a cash flow statement in simple words?

A cash flow statement shows where a business's cash came from and where it went during a year, split into three parts: operating activities (the day-to-day business), investing activities (buying or selling long-term assets and investments) and financing activities (loans, capital, interest and dividends). It ends by reconciling opening cash with closing cash, so you can see why the bank balance changed.

Is a cash flow statement mandatory for small companies?

No. Under section 2(40) of the Companies Act, 2013, the financial statements of a one person company, a small company and a dormant company may omit the cash flow statement, and a June 2017 MCA notification extended that to private companies recognised as start-ups. A small company is a private company with paid-up capital up to ₹10 crore and turnover up to ₹100 crore.

What is the difference between the direct and indirect method?

Both give the same cash from operating activities. The direct method lists actual cash receipts from customers and payments to suppliers and employees. The indirect method starts from profit before tax, adds back non-cash items such as depreciation, removes investing and financing items such as interest, and adjusts for changes in stock, receivables and payables. AS 3 allows both; most Indian companies use the indirect method.

Why is profit different from cash flow?

Profit is recorded when you earn income and incur expenses, not when cash moves. Sales on credit raise profit but not cash until customers pay; buying stock uses cash but isn't an expense until sold; depreciation reduces profit without any cash leaving; loan repayments and machinery purchases use cash without touching profit. A growing business can be profitable and still run short of cash.

Where is interest paid shown in a cash flow statement?

For a business that is not a bank or financial institution, AS 3 classifies interest paid and dividends paid as financing activities, and interest and dividends received as investing activities. Ind AS 7, as applied in India, follows the same split for non-financial entities. Financial institutions show interest paid and received in operating activities.

What are cash equivalents?

Cash equivalents are short-term, highly liquid investments that can be converted to a known amount of cash with little risk of change in value. AS 3 says an investment normally qualifies only if it has a maturity of about three months or less from the date of acquisition — such as a 60-day fixed deposit or a liquid mutual fund. Equity shares are not cash equivalents.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 8 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Companies Act, 2013 — section 2(40) (financial statement) and section 2(85) (small company) — India Code (Legislative Department) · accessed 8 October 2026
2. 2.Accounting Standard (AS) 3, Cash Flow Statements — ICAI · accessed 8 October 2026
3. 3.Appendix I to the Compendium of Accounting Standards — applicability — ICAI · accessed 8 October 2026
4. 4.Applicability of Accounting Standards to non-company entities (from 1 April 2024) — ICAI (EIRC) · accessed 8 October 2026
5. 5.Ind AS 7, Statement of Cash Flows — Board of Studies (Academic) presentation — ICAI Board of Studies · accessed 8 October 2026
6. 6.Additional exemptions for private companies (MCA notification of 13 June 2017) — AZB & Partners · accessed 8 October 2026
7. 7.MCA raises small company thresholds to ₹10 crore capital and ₹100 crore turnover — Taxmann · accessed 8 October 2026
8. 8.Ind AS disclosure reforms for supply chain finance arrangements — Vinod Kothari Consultants · accessed 8 October 2026
9. 9.Startup Playbook — exclusive benefits for DPIIT-recognised startups (April 2026) — Startup India (DPIIT) · accessed 8 October 2026