Cash Flow: From Pocket Money to the Cash Flow Statement

Think of your own pocket money. You get ₹500 from your parents. You spend ₹200 on snacks, ₹100 on a movie ticket, and save ₹200. At the end of the month, your cash in hand has increased by ₹200. That's a cash inflow. If you had spent ₹600 instead, your cash would have decreased by ₹100 — a cash outflow.

Now imagine you run a small business. You sell goods worth ₹10,000, but the customer pays you next month. You also pay rent ₹2,000 in cash today. Your profit might be ₹8,000, but your cash actually went down by ₹2,000. Cash flow is the difference between cash coming in and cash going out during a period. It is not the same as profit.

Why Cash Flow Matters

A business can be profitable on paper yet run out of cash. This is called insolvency — the inability to pay bills when they fall due. Cash flow tells you whether the business has enough liquid money to survive day-to-day operations. The Cash Flow Statement (CFS) is a mandatory financial statement under AS-3 (Accounting Standard 3) for listed companies. It shows why cash changed during the year.

The Three Activities of Cash Flow

The NCERT textbook classifies all cash flows into three buckets:

Accounting Treatment — No Debit/Credit Here

The Cash Flow Statement is not a journal entry. It is a statement — a report that rearranges information already recorded in the books. You do not debit or credit any account while preparing it. Instead, you analyse the Balance Sheet and Statement of Profit & Loss to identify cash movements.

For example, if the Balance Sheet shows:

• Debtors increased from ₹50,000 to ₹70,000 → cash inflow from debtors is less than sales. So you deduct the increase from operating profit.
• Creditors increased from ₹30,000 to ₹40,000 → you delayed paying suppliers → cash outflow is less than purchases. So you add the increase to operating profit.

The Proforma of a Cash Flow Statement (as per NCERT)

Below is the standard format. All figures are illustrative — do not treat them as real data.

Key Formulas You Must Know

While preparing the CFS, you will need these:

• Cash from Operations (Direct Method) = Cash received from customers – Cash paid to suppliers – Cash paid for expenses – Cash paid for taxes
• Cash from Operations (Indirect Method) = Net Profit + Non-cash expenses (depreciation, amortisation) + Loss on sale of assets – Profit on sale of assets + Decrease in current assets – Increase in current assets + Increase in current liabilities – Decrease in current liabilities
• Net Cash Flow = Total Inflows – Total Outflows

The Bottom Line

The Cash Flow Statement answers one question: Where did the cash come from, and where did it go? It is not about profit — it is about liquidity. For a Class 12 exam, focus on:

1. Classifying each transaction into Operating, Investing, or Financing.
2. Adjusting net profit for non-cash items and working capital changes.
3. Presenting the final statement in the correct format.

Master this, and you will understand the financial health of any business — not just its earnings.