Cash Flow Statement step by step (AS-3, indirect method)

Net profit before tax, non-cash items, working capital changes, then investing and financing — the order that makes Cash Flow Statement questions easy.

The Cash Flow Statement is often the last chapter taught and the most feared. Follow a fixed order every time and it becomes one of the most scoring questions.

Step 1: Net profit before tax and extraordinary items

Start with the change in the Statement of Profit and Loss balance (surplus). Add back the provision for tax made, proposed or interim dividend paid during the year, and transfers to reserves. This gives net profit before tax — RD Classes students call this WN 1.

Step 2: Adjust non-cash and non-operating items

• Add: depreciation, amortisation (goodwill, patents written off), loss on sale of fixed assets, interest on debentures and long-term borrowings, provisions.
• Less: profit on sale of fixed assets or investments, dividend received, interest received (for a non-financial company).

The result is operating profit before working capital changes.

Step 3: Working capital changes

• Increase in a current asset (inventory, trade receivables): subtract.
• Decrease in a current asset: add.
• Increase in a current liability (trade payables, outstanding expenses): add.
• Decrease in a current liability: subtract.

Then subtract income tax paid. This is cash from operating activities (CFO).

Step 4: Investing activities (CFI)

Purchase and sale of fixed assets and non-current investments, interest and dividend received. Prepare the asset account as a working note when depreciation or a sale is involved.

Step 5: Financing activities (CFF)

Issue and redemption of shares and debentures, long-term loans raised and repaid, interest paid on borrowings and debentures, and dividend paid.

Step 6: Check

CFO + CFI + CFF = net increase or decrease in cash and cash equivalents. Opening + change = closing. If it does not tally, check Step 1 first — it is where most errors start.