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Explore the significance of Cash Flow Statement in financial reporting, following IAS 7/IND AS 7. Learn about its components, classifications, and definitions, essential for understanding a company’s liquidity and decision-making process.

The statement of cash flows is an essential financial statement that shows how cash and cash equivalents move in and out of a company over a specified period. It is a crucial tool for assessing a company’s liquidity, solvency, and overall cash health. In this article, we will take a closer look at the Statement of Cash Flows with reference to the International Accounting Standards 7 (IAS 7) and the Indian Accounting Standards 7 (IND AS 7).

Importance of Statement of cash flows

1. The ability of the company: The statement of cash flows analyses the movement (inflows & outflows) in cash and cash equivalents during a period. The statement of cash flows shows the ability of any company to generate cash and provides valuable insights into the liquidity and solvency position of an entity.

2.Decision-making: By tracking cash inflows and outflows, businesses can gain a better understanding of their cash position and make informed decisions about investments, financing, and operations.

3. Cash basis of accounting: The statement of cash flows is the only statement that ignores the accrual principle and is prepared according to the cash principle. All other financial statements follow the accrual principle and contain many non-cash transactions that must be eliminated when preparing the Statement of Cash Flows.


1. Cash: comprises cash on hand and demand deposits.

2. Cash Equivalents: cash equivalents are short-term (less than three months from the date of acquisition), highly liquid investments that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value. It’s worth noting that cash equivalents are held for meeting short-term cash commitments and not for investment or other purposes.

Components of the statement of cash flow

1. Operating activities: Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Operating cash flows are reported using either the direct or the indirect method. It is useful in determining the extent to which the entity’s activities have generated adequate cash flows to repay debts, maintain the entity’s operational capabilities, pay dividends, and make new investments without relying on external sources of funding.

This method shows major classes of gross cash receipts and gross payments are disclosed. The net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:
Eg. 1. Cash receipts from customers Eg. 1. Changes in the workings capital (inventories and operating receivables and payables)
2. Cash paid to suppliers 2. Non-cash items (e.g., depreciation, provisions, deferred taxes, unrealized foreign currency gains and losses etc.)
3. Cash paid to employees 3. Other items of income/expense associated with investing or financing cash flows. (e.g., Interest / Dividend paid/Tax paid)
4. Cash paid for other operating expenses E.g., Insurance
5. Cash payments or refunds of income taxes

2. Investing activities: Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Only expenditure that results in the recognition of an asset in the balance sheet is eligible for classification as investing activities.

3. Financing activitiesFinancing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

Cash Flow Statement

Other important considerations

1. Gross or Net cash flows: Cash flows must be reported on a “gross basis”. Presentation on a net basis is permitted only in very limited cases like cash receipts/payments made on behalf of customers (E.g., Stockbrokers (Zerodha) or Financial institutions).

2. Non-cash transactions: Investing and Financing transactions that do not require the use of cash or cash equivalents shall be excluded from the Statement of Cash Flows.

3. Presentation of extraordinary items is not permitted under IND-AS/IFRS.

Classifications in the statement of cash flows

1. Bank Overdrafts which are an integral part of an entity’s cash management are included as a component of cash & cash equivalent and not as a part of financing activity.

2. Interest and Dividend: IAS 7 allow some flexibility in the classification of cash flows from interest and dividends received and paid, as long as they are separately disclosed. However, each category is classified in a consistent manner from period to period as either operating, investing, or financing activities, depending on the nature of the entity’s activities. The total amount of interest paid during a period is disclosed in the Statement of Cash Flows whether it has been recognized as an expense in profit or loss or capitalized in accordance with IAS 23 “Borrowing Cost”.

  • For Financial institutions – Interest Paid & Interest & Dividends received are to be classified as Operating Activities. The dividend paid is to be classified as a financing activity.
  • For other entities – An accounting policy choice needs to be made. In common, Interest & dividends received are to be classified as investing activity, and interest and dividends paid are required to be classified as a financing activity.

3. Cash flows relating to a business combination: The combined cash flows arising from acquisitions and disposals of subsidiaries (or) other business units shall be presented separately and categorized as investing activities.

4. Cash flows from income taxes shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

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June 2024