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

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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 as operating, investing or financing.

In this lesson you will

Explain the meaning and importance of a cash flow statement under AS 3 (revised)
Identify cash and cash equivalents and recognise what is not a cash flow
Classify cash flows into operating, investing and financing activities
Place the special items in the ISC syllabus: proposed and interim dividends, issue expenses, redemption premium, loans given

Part 1 at a glance

Concept

Profit is not cash

Profit follows the accrual basis; cash moves only when money is received or paid.
Kunzum Solar Ltd (imagined), 2025-26	₹
Net profit before tax	4,00,000
Add: Depreciation (no cash paid)	80,000
Less: Increase in trade receivables (sales not yet collected)	(2,30,000)
Less: Increase in inventories (cash tied up in panels and inverters)	(60,000)
Less: Income tax paid	(70,000)
Less: Solar panels bought for its own plant	(1,40,000)
Less: Dividend proposed last year, paid this year	(50,000)
Net decrease in cash	(70,000)

Concept

Meaning of a cash flow statement

Prepared under AS 3 (revised), Cash Flow Statements.
Covers a period: inflows and outflows of cash and cash equivalents, grouped into three activities.

AS 3 (revised), Cash Flow Statements.
Part of the statement	Shows…
A. Operating activities	cash from the main revenue-earning business, after tax paid
B. Investing activities	cash spent on and received from long-term assets, investments and loans given
C. Financing activities	cash raised from and returned to shareholders and lenders
Net change (A + B + C)	the increase or decrease in cash and cash equivalents
Opening and closing balances	the link with the two balance sheets