Cash Flow Statement — Part 2: Preparation by the Indirect Method, with Adjustments: visual lesson, ISC Class 12 Accounts

Lesson

Preparing the statement: the indirect method

Part 2 — from two balance sheets and additional information to a complete cash flow statement, ending with the cash check.

In this lesson you will

Work out net profit before tax, treating the previous year’s proposed dividend, the interim dividend and the current proposal correctly
Adjust profit for depreciation, amortisation, sale of assets, provision for doubtful debts, finance costs and working capital
Use working accounts for fixed assets, accumulated depreciation, investments, provision for tax and securities premium
Prepare the investing and financing sections and check the statement against the change in cash

The indirect method, step by step

Concept

Skeleton of a cash flow statement by the indirect method: operating section from net profit before tax to net cash from operating activities, then investing and financing, the net change and the closing balance
Cash Flow Statement for the year ended …	₹	₹
A. Cash flows from operating activities
Net profit before tax (working note)	xxx
Add: non-cash charges and finance costs; Less: non-operating income	xxx
Operating profit before working capital changes	xxx
Add / Less: changes in current assets and current liabilities	xxx
Cash generated from operations; Less: income tax paid	xxx
Net cash from (used in) operating activities		xxx
B. Net cash from (used in) investing activities		xxx
C. Net cash from (used in) financing activities		xxx
Net increase or decrease (A + B + C); add opening cash and cash equivalents		xxx
Cash and cash equivalents at the end of the year		xxx

Concept

An imagined company; current year first, in the Schedule III order.
Particulars	31 March 2026 (₹)	31 March 2025 (₹)
I. Equity and Liabilities
Shareholders' funds
Equity share capital	15,00,000	12,00,000
Securities premium	67,000	50,000
General reserve	1,60,000	1,00,000
Balance in the Statement of Profit and Loss	2,30,000	1,40,000
Non-current liabilities
9% Debentures	3,00,000	4,00,000
Current liabilities
Trade payables	1,90,000	1,60,000
Outstanding expenses	18,000	25,000
Short-term provisions: provision for tax	90,000	70,000
Total	25,55,000	21,45,000
II. Assets
Non-current assets
Knitting machinery (at cost)	17,00,000	14,00,000
Less: Accumulated depreciation on machinery	(4,10,000)	(3,50,000)
Patents	60,000	80,000
Non-current investments	2,40,000	3,00,000
Current assets
Inventories	3,30,000	2,80,000
Trade receivables	2,70,000	2,40,000
Less: Provision for doubtful debts	(15,000)	(12,000)
Prepaid expenses	6,000	9,000
Cash and cash equivalents	3,74,000	1,98,000
Total	25,55,000	21,45,000