Cash Flow Statement Format with Example (Indirect and Direct)

What is a cash flow statement?

A cash flow statement shows where a business got its cash during the year and where that cash went. The profit and loss account tells you whether the business earned a profit. The balance sheet shows what it owns and owes on one date. Neither tells you why the bank balance went up or down, and that is the gap this statement fills.

Two definitions from AS 3 (Revised), as published by ICAI, decide what counts as “cash”:

• Cash: “Cash comprises cash on hand and demand deposits with banks.”
• Cash equivalents: “Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.”

AS 3 adds that an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Shares are usually not cash equivalents. Moving money between cash and cash equivalents, such as putting spare cash into a 60-day deposit, is not a cash flow at all; it’s just cash management.

Before you take the cash and bank figure from a balance sheet, make sure it has been checked against the bank. A bank reconciliation statement is how accountants confirm that figure.

Who has to prepare one?

Under section 2(40) of the Companies Act, 2013, a company’s financial statements include a cash flow statement, but a One Person Company, a small company and a dormant company “may not include the cash flow statement”. ICAI’s note to AS 3 says it is not mandatory for micro, small and medium-sized non-company entities, so sole traders and partnership firms usually don’t prepare one.

One point many websites get wrong: Schedule III does not give a cash flow statement format. Division I covers only the balance sheet and the statement of profit and loss; Divisions II and III say the cash flow statement “shall be prepared, where applicable, in accordance with the requirements of the relevant Indian Accounting Standard”.

Cash flow statement format (indirect method)

This is the layout used by AS 3’s own illustration and by the NCERT textbook. The sections and subtotals are fixed; the lines inside each section depend on the question. Amounts in brackets are outflows.

Name of the company
Cash Flow Statement for the year ended 31 March 20XX

Start from net profit before tax, deduct the income tax actually paid near the end of section A, and close by reconciling to the balance sheet cash, as AS 3 para 42 requires.

Operating, investing and financing activities

Every cash flow goes into one of three sections. Learn the three AS 3 definitions:

• Operating activities “are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.”
• Investing activities “are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.”
• Financing activities “are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise.”

Operating activities are defined by exclusion: anything that is not investing or financing. So the practical test is to ask two questions. Does this concern a long-term asset or an investment? Then it’s investing. Does it change the owners’ capital or the borrowings? Then it’s financing. If neither, it’s operating.

Interest and dividends: the rule that changes with the business

AS 3 para 30 treats a bank or other financial enterprise differently, because lending and borrowing is its main business. For such an enterprise, interest paid and interest and dividends received are operating cash flows. For every other enterprise, interest paid is a financing cash flow and interest and dividends received are investing cash flows. Dividends paid are financing for both.

Many foreign websites show interest paid under operating activities; that treatment does not follow AS 3. For an Indian exam, or an Indian company on AS 3, keep a trading company’s interest paid under financing.

Income tax and the profit or loss on sale of assets

Tax paid on business profits is an operating outflow. The NCERT textbook adds that capital gains tax on the sale of fixed assets goes under investing activities, with the sale itself. A profit or loss on selling a machine is removed from the operating section, because the full sale price appears under investing (AS 3 para 13). Counting it in both places is one of the most common mistakes.

Non-cash transactions are left out

AS 3 para 40 excludes investing and financing transactions that don’t use cash or cash equivalents. Buying machinery by issuing shares to the seller, converting debentures into shares, or taking over an asset along with its loan are examples. They go in the notes instead, not in the statement.

Indirect method: how it turns profit into cash

The indirect method starts with net profit before tax and makes three kinds of adjustment, listed in AS 3 para 20:

1. Non-cash items: add back depreciation, amortisation, goodwill written off and provisions, because they reduced profit without any cash leaving.
2. Investing and financing items in the P&L: add back interest expense and losses on sale of assets; subtract interest and dividend income and profits on sale of assets. Their cash goes to sections B and C instead.
3. Working capital changes: adjust for the movement in inventories, operating receivables and payables.

The working capital step trips up more students than anything else. Use this table, which follows the rule in the NCERT text:

Leave out cash and cash equivalents themselves, and leave out provision for tax and dividend payable. Tax is handled through “income tax paid”, and dividends go to financing. Short-term borrowings such as cash credit are financing items too, not working capital.

How to prepare a cash flow statement from two balance sheets

Most exam questions say “from the following balance sheets, prepare a cash flow statement”. You get the balance sheets for two years plus a few lines of additional information. If you need a refresher on the layout of the balance sheet itself, see our balance sheet format with example; here we only use it.

Cash flow statement example with solution

Question (hypothetical figures): The summarised balance sheets of Asha Traders Ltd are given below. Prepare a cash flow statement for the year ended 31 March 2026 by the indirect method.

Additional information:

1. Depreciation charged on machinery during the year was ₹70,000.
2. A machine with a book value of ₹40,000 was sold for ₹30,000.
3. Investments costing ₹50,000 were sold for ₹60,000.
4. ₹1,00,000 of the 10% debentures were redeemed at par on 30 September 2025. Interest of ₹25,000 on debentures was paid during the year.
5. A dividend of ₹40,000 for 2024-25 was approved at the AGM and paid during the year.
6. A dividend of ₹6,000 was received on the investments.
7. Provision for tax made during the year was ₹65,000.

Step 1: net profit before tax

The surplus went up by ₹90,000. That is what was left of the year’s profit after the dividend was paid out of it, and the profit itself was after tax. So add both back:

Step 2: the cash flow statement

Step 3: workings

The machinery account works backwards from the closing balance. Opening machinery of ₹7,00,000 lost ₹70,000 to depreciation and ₹40,000 to the machine sold, leaving ₹5,90,000. Closing machinery is ₹8,40,000, so ₹2,50,000 must have been bought. The balance sheets never show purchases or tax paid directly, so practise these two ledger accounts; if a balancing figure looks odd, recheck the additional information first.

Step 4: check the answer

Operations generated ₹1,69,000 after tax. The company spent ₹1,54,000 net on investing, mainly the new machine, and raised ₹35,000 net from financing, since the share issue covered the debenture redemption, interest and dividend. Cash rose by ₹50,000. The profit after tax was ₹1,30,000, but cash from operations was higher because depreciation of ₹70,000 reduced profit without using cash.

Direct method format with example

The direct method changes only section A. Instead of adjusting profit, it lists the major classes of gross cash receipts and payments: cash from customers, cash paid to suppliers, cash paid to employees and so on. Sections B and C are the same as in the indirect method.

It needs the statement of profit and loss as well. Here is the one behind the example, with the same profit before tax of ₹1,95,000:

Assume all sales and purchases are on credit, trade payables relate only to goods, and no expenses are outstanding or prepaid. Then:

Both methods give ₹2,24,000 of cash generated from operations and ₹1,69,000 of net cash from operating activities. If your two answers differ, a working capital or non-cash item has been missed.

Direct vs indirect method

Cash flow statement for class 12 and B.Com

The NCERT class 12 chapter on the cash flow statement (Accountancy Part II, chapter 6) explains both methods but works its problems by the indirect method, so master that one for board exams. The direct method is still worth knowing: AS 3 calls it the more appropriate method, and some questions ask for it.

Points that come up again and again:

• Start with profit before tax and extraordinary items. If the question gives only the surplus, rebuild the profit as in Step 1 above.
• Provision for tax. Prepare the provision for tax account: opening balance plus provision made, less closing balance, gives tax paid, and the account gives the provision made when tax paid is stated instead. If neither is given, NCERT’s solved examples assume last year’s provision was paid this year, so this year’s provision is the closing balance.
• Proposed dividend. NCERT notes that a dividend proposed for the previous year is approved and paid in the current year. Add it back to profit and show it as dividend paid under financing.
• Classification lists. NCERT’s own exercise gives 33 items to classify, including bank overdraft, cash credit and marketable securities. The Excel practice sheet covers the usual ones.

B.Com accounting papers build on the same chapter; our list of B.Com subjects shows which accounting papers come in which semester.

Ind AS 7: what changes for Ind AS companies

Companies that follow Indian Accounting Standards prepare a “statement of cash flows” under Ind AS 7. The three sections, both methods and the reconciliation stay the same. Two points to know:

• Interest and dividends: ICAI’s Ind AS 7 material gives the same interest and dividend split as AS 3.
• Bank overdraft: under Ind AS 7, bank borrowings are usually financing. But an overdraft repayable on demand that forms an integral part of the entity’s cash management is included in cash and cash equivalents. ICAI’s material treats a cash credit facility as financing.

For class 12 and most B.Com questions, follow AS 3 and the treatment in your textbook’s solved examples.

Common mistakes in a cash flow statement

• Starting from profit after tax and then deducting tax paid as well, which counts tax twice.
• Reversing the working capital signs. An increase in debtors is a deduction, not an addition.
• Taking the change in the machinery balance as the purchase. The change mixes purchases, sales and depreciation; prepare the asset account.
• Not reconciling. If opening cash plus the net flow doesn’t equal closing cash, the statement is wrong, however neat it looks.

The same ideas come up in interviews for accounts jobs: why profit isn’t cash, and where depreciation goes. Our accounting interview questions and answers cover the basics they check first.

Free cash flow statement format in Excel and PDF

Both files are free, with no sign-up:

• Cash flow statement format in Excel (.xlsx): type two balance sheets and the additional information into the yellow cells, and the indirect-method statement builds itself with live formulas. A check cell confirms that opening cash plus the net flow equals the closing cash. It also has a direct-method sheet, the blank format and a classification practice sheet with answers.
• Cash flow statement format PDF: the blank indirect and direct formats, a classification guide, and the worked example above with its full solution, ready to print.

The Excel file comes filled with the Asha Traders Ltd example; replace the figures with your own question, and add a line for any extra item such as goodwill written off. If you want to build sheets like this yourself, start with these Excel formulas for accounting.

Cash flow statement in Hindi (नकद प्रवाह विवरण)

How we teach this at IPA

IPA (Institute of Professional Accountants) has taught accounting at Laxmi Nagar, Delhi, since 2003. A cash flow statement is only as good as the two balance sheets behind it, and that is where our ADFA diploma in financial accounting spends its time. Its accounting foundations module covers trading and profit and loss accounts, the balance sheet and balance sheet finalisation, depreciation and rectification entries, and bank reconciliation, along with MS Excel and Tally Prime.

Teaching at IPA is practical: every entry has a consequence, and students are encouraged to ask until it makes sense. It’s the same discipline as getting a trial balance to tally before you draw up final accounts.

Frequently asked questions