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

A Cash Flow Statement under AS-3 explains how a company's cash and cash equivalents moved over the year, by classifying every flow into operating, investing and financing activities. Under the indirect method you start from net profit before tax, strip out non-cash and non-operating items, adjust for working-capital changes, and arrive at the net increase or decrease in cash — which must reconcile to the Balance Sheet.

Who has to prepare one

Accounting Standard AS-3 (Cash Flow Statements) governs the statement itself. Whether you must present one is decided elsewhere — by the Companies Act for a company, and by the ICAI classification for everyone else.

Companies

Section 2(40) of the Companies Act, 2013 makes the Cash Flow Statement part of the financial statements, but the proviso to that section says the financial statements of the following may not include one:

• a One Person Company (OPC);
• a small company;
• a dormant company; and
• a private company which is a start-up, added by the 2017 exemption notification for private companies.

Note the wording: the exemption is permissive. Such a company may omit the statement; nothing stops it from presenting one, and many do because lenders ask for it.

Two limits that have not moved: the small company definition in section 2(85) still excludes a public company, a holding or subsidiary company, a company registered under section 8, and a company or body corporate governed by any special Act — so a private company within a group does not become small merely by being under the money thresholds.

Non-corporate entities and LLPs

For a firm, proprietorship, trust, society or LLP the question is settled by the ICAI's Revised Criteria for classification of Non-company entities, which lists AS 3 among the standards that do not apply to a Micro, Small and Medium Sized Entity (MSME) in their entirety. So only a Large entity— one that fails any limb of the MSME test — must present a Cash Flow Statement. An MSME may still prepare one voluntarily, and ICAI encourages it. See the ICAI Non-Corporate Entity format guide for the MSME test itself.

Where it is required, it is not a standalone document — it is the third primary statement, and the cash figure it lands on has to tie back to the face of the Balance Sheet.

The three activities

A cash flow statement classifies all movements in cash and cash equivalents into three buckets. The same rupee of cash belongs in exactly one of them.

The full statement format

The complete AS-3 indirect-method statement, line for line. There is no Note column — the cash flow statement prints without one — and the closing cash figure must tie to the face of the Balance Sheet.

The indirect method for operating activities

This is the heart of the statement. The indirect method does not show cash receipts and payments directly — instead it reconciles net profit to cash through a fixed sequence of adjustments. Work through it in order.

Step 1 — Start with Net Profit Before Tax

Begin with net profit before tax and extraordinary items, taken from the Statement of Profit and Loss. This is an accrual figure, so it includes income and expenses that did not move cash this year. The whole exercise is about correcting for that.

Step 2 — Add back non-cash and non-operating expenses

Add back items that were charged to the P&L but did not reduce operating cash:

• Depreciation and amortisation — a book charge, no cash leaves the company;
• Impairment losses on assets;
• Loss on sale of assets — the cash effect belongs in investing, not operating;
• Finance costs / interest expense — these are reported under financing, so remove them here.

Step 3 — Deduct non-operating incomes

Subtract incomes that increased profit but are not part of operating cash, because their cash will be shown under investing:

• Interest income;
• Dividend income;
• Profit on sale of assets.

After Steps 2 and 3 you have the Operating Profit before Working Capital Changes.

Step 4 — Adjust for working-capital changes

Now convert that figure into actual cash by adjusting for movements in current items. The rule is symmetrical:

Apply this to changes in inventories, trade and other receivables, and trade and other payables. The result is Cash Generated from Operations.

Step 5 — Less income taxes paid

Deduct income taxes paid (net) during the year. What remains is Net Cash from / (used in) Operating Activities.

Investing activities

This section reports the cash spent on, and recovered from, long-term assets and investments:

• Purchase of property, plant & equipment and of investments (cash outflows);
• Sale of property, plant & equipment and of investments (cash inflows);
• Interest and dividends received on those investments.

The interest and dividend income you removed in Step 3, and the profit/loss on sale you removed in Steps 2 and 3, reappear here as their real cash amounts — which is exactly why they are stripped out of the operating section, to avoid double-counting.

Financing activities

This section reports cash raised from, and returned to, the providers of capital:

• Proceeds from long-term and short-term borrowings, and their repayment;
• Proceeds from issue of share capital;
• Dividends paid;
• Interest paid — the finance cost added back in Step 2 lands here as an actual outflow.

The closing reconciliation

Add the three activity totals to get the net change in cash, then tie it to the opening and closing positions:

1. Net Cash from Operating Activities
2. + / − Net Cash from Investing Activities
3. + / − Net Cash from Financing Activities
4. = Net increase / (decrease) in cash and cash equivalents
5. + Opening cash and cash equivalents
6. = Closing cash and cash equivalents

That closing figure must reconcile to the cash and bank balances on the Balance Sheet. If it does not tie out, the statement is wrong — usually a working-capital change with the wrong sign, or a non-cash item missed in Step 2 or Step 3. This reconciliation is the built-in check that makes AS-3 self-verifying.

Related guides

• Schedule III Balance Sheet format
• Trial Balance to Financial Statements