by The Cash Flow Statement is prepared to show the movement of cash and cash equivalents during an accounting period. According to Ind AS 7, Statement of Cash Flows, cash flows are classified into Operating Activities, Investing Activities, and Financing Activities. The statement begins with opening cash and cash equivalents and explains the changes resulting from various cash transactions. Proper classification helps users understand the organisation’s ability to generate cash, meet obligations, invest in assets, and obtain finance. The final cash balance is reconciled with the closing cash and cash equivalents shown in the financial statements.
1. Identify Cash and Cash Equivalents
The first step is to identify the opening and closing balances of cash and cash equivalents. Cash includes cash in hand and demand deposits, while cash equivalents are short term, highly liquid investments that can be readily converted into known amounts of cash and carry insignificant risk of changes in value. Under Ind AS 7, investments normally qualify as cash equivalents when their maturity from the date of acquisition is generally three months or less. The opening balance is used as the starting point, while the closing balance is used to verify the final cash position.
Journal Entries:
| Transaction | Journal Entry |
|---|---|
| Cash deposited in bank | Bank A/c Dr.
To Cash A/c |
| Cash withdrawn from bank | Cash A/c Dr.
To Bank A/c |
| Cash equivalent investment purchased | Cash Equivalent Investment A/c Dr.
To Bank A/c |
2. Classify Cash Transactions
After identifying cash and cash equivalents, all cash transactions are classified into Operating, Investing, and Financing Activities. Operating activities relate mainly to the principal revenue generating activities of the organisation. Investing activities involve acquisition and disposal of long term assets and investments. Financing activities result in changes in contributed equity and borrowings. Proper classification is essential for presenting the Cash Flow Statement according to Ind AS 7. Transactions that do not involve actual cash movement, such as depreciation or issue of shares for acquiring an asset, are excluded from the cash flow statement but may require separate disclosure.
Journal Entries:
| Transaction | Journal Entry | Classification |
|---|---|---|
| Cash received from customers | Cash/Bank A/c Dr.
To Customers A/c |
Operating |
| Machinery purchased | Machinery A/c Dr.
To Cash/Bank A/c |
Investing |
| Loan received | Cash/Bank A/c Dr.
To Loan A/c |
Financing |
3. Calculate Cash Flow from Operating Activities
Cash flow from Operating Activities represents cash generated or used in the organisation’s principal revenue generating activities. Under Ind AS 7, operating cash flows may be presented using the Direct Method or Indirect Method. The Direct Method reports major classes of cash receipts and payments, while the Indirect Method begins with profit or loss and adjusts for non cash items, working capital changes, and other relevant items. Cash received from customers and cash paid to suppliers, employees, and for operating expenses are generally considered. The resulting amount represents the organisation’s net operating cash flow.
Journal Entries:
| Transaction | Journal Entry |
|---|---|
| Cash received from customers | Cash/Bank A/c Dr.
To Customers A/c |
| Cash paid to suppliers | Suppliers A/c Dr.
To Cash/Bank A/c |
| Salaries paid | Salaries A/c Dr.
To Cash/Bank A/c |
| Rent paid | Rent A/c Dr.
To Cash/Bank A/c |
| Operating expenses paid | Expenses A/c Dr.
To Cash/Bank A/c |
4. Calculate Cash Flow from Investing Activities
Investing Activities involve cash transactions relating to the acquisition and disposal of long term assets and investments. Cash paid for purchasing Property, Plant and Equipment, land, buildings, machinery, and investments is generally treated as an investing outflow. Cash received from selling such assets or investments is generally an investing inflow. Loans and advances given to other parties and their subsequent collection may also be considered. Under Ind AS 7, non cash investing transactions are excluded from the Cash Flow Statement. Therefore, only actual cash receipts and payments relating to investing activities are presented.
Journal Entries:
| Transaction | Journal Entry |
|---|---|
| Machinery purchased | Machinery A/c Dr.
To Cash/Bank A/c |
| Land purchased | Land A/c Dr.
To Cash/Bank A/c |
| Investment purchased | Investments A/c Dr.
To Cash/Bank A/c |
| Machinery sold | Cash/Bank A/c Dr.
To Machinery A/c |
| Investment sold | Cash/Bank A/c Dr.
To Investments A/c |
| Loan given | Loan A/c Dr.
To Cash/Bank A/c |
5. Calculate Cash Flow from Financing Activities
Financing Activities result in changes in the size and composition of contributed equity and borrowings of the organisation. Cash received from issuing equity shares, preference shares, debentures, and obtaining loans is generally treated as financing inflows. Repayment of borrowings, redemption of securities, and share buybacks generally represent financing outflows. Dividend and interest related cash flows must be classified according to the applicable requirements of Ind AS 7. The net amount of financing cash flows indicates how the organisation has raised and repaid financial resources during the accounting period.
Journal Entries:
| Transaction | Journal Entry |
|---|---|
| Equity shares issued | Cash/Bank A/c Dr.
To Share Capital A/c |
| Debentures issued | Cash/Bank A/c Dr.
To Debentures A/c |
| Loan obtained | Cash/Bank A/c Dr.
To Loan A/c |
| Loan repaid | Loan A/c Dr.
To Cash/Bank A/c |
| Debentures redeemed | Debentures A/c Dr.
To Cash/Bank A/c |
| Shares bought back | Equity Share Capital A/c Dr.
To Cash/Bank A/c |
6. Calculate Net Increase or Decrease in Cash
After calculating the cash flows from Operating, Investing, and Financing Activities, the net increase or decrease in cash and cash equivalents is determined. The amounts of all three activities are added together after considering their respective inflows and outflows. The resulting figure represents the overall change in cash during the accounting period. This amount is then added to the opening cash and cash equivalents to determine the closing balance. This calculation ensures that the Cash Flow Statement properly explains the movement between the opening and closing cash positions.
Formula:
Net Change in Cash = Operating Cash Flow + Investing Cash Flow + Financing Cash Flow
Journal Entry:
| Particular | Journal Entry |
|---|---|
| Net increase in cash | Cash/Bank A/c Dr.
To Cash Flow Adjustment A/c |
| Net decrease in cash | Cash Flow Adjustment A/c Dr.
To Cash/Bank A/c |
The above entries are illustrative for understanding cash movement; the Cash Flow Statement itself is a statement of cash flows rather than a journal entry book.
7. Reconcile and Present the Cash Flow Statement
The final step is to prepare and present the Cash Flow Statement in accordance with Ind AS 7. The opening cash and cash equivalents are added to the net increase or decrease in cash calculated from operating, investing, and financing activities. The resulting amount should agree with the closing cash and cash equivalents shown in the financial records. Appropriate disclosures are also made for significant non cash transactions and other required information. This reconciliation provides users with a clear explanation of changes in the organisation’s cash position during the accounting period.
Journal Entries:
| Transaction | Journal Entry |
|---|---|
| Closing cash balance transferred | Cash Flow A/c Dr.
To Cash/Bank A/c |
| Cash balance brought forward | Cash/Bank A/c Dr.
To Opening Balance A/c |
Overall Format under Ind AS 7:
Opening Cash and Cash Equivalents
+ Net Cash Flow from Operating Activities
+ Net Cash Flow from Investing Activities
+ Net Cash Flow from Financing Activities
= Closing Cash and Cash Equivalents
