Cash Flow Statement: Operating, Investing & Financing Activities

A company may declare large accounting profits and still bounce cheques because profits do not equal liquid cash! The Cash Flow Statement (prepared under Accounting Standard-3 (Revised) in India) tracks the exact physical inflows and outflows of cash and cash equivalents across three distinct corporate activities.

1. What is Cash and Cash Equivalents?

Under AS-3:

Cash: Cash on hand and demand bank deposits.
Cash Equivalents: Short-term, highly liquid investments that are readily convertible into known amounts of cash with insignificant risk of change in value (maturity period of 90 days or less, like Treasury Bills and commercial paper).

2. Cash Flow Statement vs Funds Flow Statement

Basis	Cash Flow Statement	Funds Flow Statement
Concept of Fund	Narrow concept: Only Cash & Cash Equivalents	Broader concept: Net Working Capital (CA - CL)
Accounting Basis	Strict Cash Basis of accounting	Accrual Basis of accounting
Standard Format	Mandatory 3-activity format under AS-3	No rigid statutory standard format
Planning Horizon	Essential for short-term daily liquidity planning	Useful for medium and long-term capital planning

3. The Three Functional Activities of Cash Flow

Under AS-3, every cash movement is classified into one of three activities:

               ┌───────────────────────────────┐
               │      CASH FLOW STATEMENT      │
               └───────────────┬───────────────┘
                               │
       ┌───────────────────────┼───────────────────────┐
       ▼                       ▼                       ▼
┌──────────────┐        ┌──────────────┐        ┌──────────────┐
│  OPERATING   │        │  INVESTING   │        │  FINANCING   │
│  ACTIVITIES  │        │  ACTIVITIES  │        │  ACTIVITIES  │
└──────────────┘        └──────────────┘        └──────────────┘

4. Activity 1: Cash Flow from Operating Activities

Operating activities are the principal revenue-generating activities of the enterprise (core business operations).

Computation Using the Indirect Method (Standard Format):

Net Profit Before Tax & Extraordinary Items           ₹ xxxx
Add: Non-Cash and Non-Operating Expenses:
     - Depreciation and Amortization                  ₹ xxxx
     - Interest Expense on Borrowings                 ₹ xxxx
     - Loss on Sale of Fixed Assets / Investments     ₹ xxxx
Less: Non-Operating Incomes:
     - Interest & Dividend Income Received            (₹ xxxx)
     - Profit on Sale of Fixed Assets                 (₹ xxxx)
                                                      --------
Operating Profit Before Working Capital Changes        ₹ xxxx

Adjustments for Working Capital Changes:
     + Decrease in Current Assets (except Cash)       ₹ xxxx
     - Increase in Current Assets (except Cash)       (₹ xxxx)
     + Increase in Current Liabilities                ₹ xxxx
     - Decrease in Current Liabilities                (₹ xxxx)
                                                      --------
Cash Generated from Operations                         ₹ xxxx
Less: Income Tax Paid (Net of refund)                 (₹ xxxx)
                                                      --------
Net Cash Flow from Operating Activities (A)           ₹ xxxx

5. Activity 2: Cash Flow from Investing Activities

Investing activities represent the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Inflows (+):

Cash receipts from sale of Fixed Assets (Plant, Land, Buildings).
Cash receipts from sale of shares/bonds of other companies.
Interest and Dividends received on investments.

Outflows (-):

Cash payments to acquire Fixed Assets and Capital Work-in-Progress.
Cash payments to buy shares, debentures, or debt instruments of other firms.

Net Cash Flow from / (used in) Investing Activities (B) = Total Inflows - Total Outflows

6. Activity 3: Cash Flow from Financing Activities

Financing activities are activities that result in changes in the size and composition of the owners’ capital and borrowings of the enterprise.

Inflows (+):

Cash proceeds from issuing Equity Shares or Preference Shares.
Cash proceeds from issuing Debentures, Bonds, or long-term Bank Loans.

Outflows (-):

Repayment of long-term borrowings and redemption of debentures/preference shares.
Cash payment of Dividends (Interim and Final) to shareholders.
Payment of Interest on debentures and loans.

Net Cash Flow from / (used in) Financing Activities (C) = Total Inflows - Total Outflows

7. The Final Reconciliation

The net sum of all three activities must equal the net change in cash balances between opening and closing dates:

Net Increase / Decrease in Cash & Cash Equivalents = A + B + C Add: Opening Cash & Cash Equivalents Equals: Closing Cash & Cash Equivalents

8. Summary & Quick Revision Checklist

Standard: Mandated by Accounting Standard-3 (AS-3 Revised) in India.
Three Activities: Operating (Core sales/purchases), Investing (Fixed assets & investments), Financing (Capital & long-term debt).
Working Capital Rule for Operating Cash: Asset down = Cash Inflow (+); Asset up = Cash Outflow (-); Liability up = Cash Inflow (+); Liability down = Cash Outflow (-).
Golden Verification: Net cash from (A + B + C) plus Opening Cash MUST equal Closing Cash on the Balance Sheet!