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Cash Flow Statement — Part 1: Meaning, Cash Equivalents and Classification of Activities

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Lesson

Cash Flow Statement

Part 1 — what the statement shows, what counts as cash and cash equivalents, and how every cash flow is classified into operating, investing and financing activities.

In this lesson you will

Explain what a cash flow statement is, why it is prepared and how profit differs from cash
Identify cash and cash equivalents and recognise what is not a cash flow
Classify cash flows into operating, investing and financing activities
Classify interest, dividends and income tax correctly for financial and non-financial companies

Part 1 at a glance

Concept

Profit is not cash

Profit is earned on the accrual basis; cash moves only when money is received or paid.
Moyar Garments Ltd (imagined), 2025-26	₹
Net profit for the year	3,00,000
Add: Depreciation (no cash paid)	60,000
Less: Increase in trade receivables (not yet collected)	(1,80,000)
Less: Increase in inventories (cash tied up in stock)	(70,000)
Less: New stitching machines bought	(1,20,000)
Less: Part of a bank loan repaid	(40,000)
Net decrease in cash	(50,000)

Concept

What is a cash flow statement?

Prepared under Accounting Standard 3 (Cash Flow Statements).
Covers a period: inflows and outflows of cash and cash equivalents.

Accounting Standard 3, Cash Flow Statements.
Section of the statement	Shows cash flows from…
A. Operating activities	the main revenue-earning business: customers, suppliers, employees, tax
B. Investing activities	buying and selling long-term assets and investments
C. Financing activities	raising and repaying owners’ capital and borrowings, interest and dividends paid
D. Net change (A + B + C)	the increase or decrease in cash and cash equivalents
E, F. Opening and closing cash	the reconciliation with the two balance sheets