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:
| Activity | What it includes | Example |
|---|
| Operating Activities | Main revenue-producing activities | Cash from selling goods, cash paid to suppliers, salaries |
| Investing Activities | Purchase/sale of long-term assets | Buying machinery, selling land, loans given |
| Financing Activities | Changes in equity and borrowings | Issue of shares, repayment of bank loan, dividend paid |
The net increase or decrease in cash during the year = Operating cash flow + Investing cash flow + Financing cash flow. This must match the change in cash balance shown in the Balance Sheet.
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.
Cash Flow Statement for the year ended 31st March 20XX
| Particulars | Amount (₹) |
|---|
| A. Cash Flow from Operating Activities | |
| Net Profit before Tax (from P&L) | 1,00,000 |
| Adjustments for non-cash items: | |
| Add: Depreciation | 20,000 |
| Add: Loss on sale of asset | 5,000 |
| Less: Profit on sale of asset | (3,000) |
| Changes in Working Capital: | |
| Increase in Debtors | (10,000) |
| Decrease in Stock | 8,000 |
| Increase in Creditors | 6,000 |
| Net Cash from Operating Activities | 1,26,000 |
| B. Cash Flow from Investing Activities | |
| Purchase of Machinery | (50,000) |
| Sale of Land | 30,000 |
| Net Cash used in Investing Activities | (20,000) |
| C. Cash Flow from Financing Activities | |
| Issue of Share Capital | 40,000 |
| Repayment of Loan | (15,000) |
| Dividend Paid | (10,000) |