Ind AS 7 — Statement of Cash Flows

Ind AS 7 governs the presentation of the statement of cash flows, which reports the changes in an entity's cash and cash equivalents during a period, classified by operating, investing, and financing activities. The cash flow statement is one of the primary statements in a complete set of Ind AS financial statements, and it answers the practical question that profit and position figures cannot: where did the cash come from and where did it go?

Objective and importance

Information about cash flows helps users assess an entity's ability to generate cash and cash equivalents and its needs to use those flows. Because cash flows are measured on a cash rather than accrual basis, they help users compare entities by removing the effects of differing accounting policy choices for the same transactions. A business can be profitable yet short of cash, so the statement provides insight into liquidity, solvency, and financial flexibility that the other statements do not.

Cash and cash equivalents

The statement explains the movement in cash and cash equivalents. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, held to meet short-term commitments rather than for investment — typically with a short maturity such as three months or less. Bank overdrafts repayable on demand that form an integral part of cash management may be included. Bank borrowings are generally financing activities.

The three classifications

The heart of Ind AS 7, as with AS 3, is the classification of cash flows into three categories:

Operating activities are the principal revenue-producing activities and other activities that are not investing or financing. Operating cash flows are a key indicator of whether operations generate enough cash to repay borrowings, maintain operating capability, pay dividends, and invest without external finance. Examples: cash from customers, cash to suppliers and employees, and tax payments (unless identified with investing or financing).

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents — for example, buying and selling property, plant and equipment, and acquiring or disposing of investments in other entities.

Financing activities change the size and composition of the contributed equity and borrowings — for example, issuing shares, raising and repaying loans.

Direct and indirect methods

Operating cash flows may be reported using the direct method (disclosing major classes of gross cash receipts and payments, such as cash received from customers and cash paid to suppliers and employees) or the indirect method (adjusting profit or loss for non-cash items, deferrals and accruals of operating items, and items associated with investing or financing flows). Ind AS 7 encourages the direct method as more informative, but the indirect method is widely used in practice. Investing and financing cash flows are reported gross by major class.

Interest, dividends, and taxes

Ind AS 7 gives some flexibility on classification that is worth noting. Cash flows from interest and dividends received and paid are each disclosed separately and classified consistently. Under Ind AS 7, interest and dividends paid can be classified as either operating or financing, and interest and dividends received as either operating or investing, provided the classification is consistent period to period (this flexibility is somewhat broader than the more prescriptive Indian-practice treatment historically applied). Cash flows arising from taxes on income are separately disclosed and classified as operating unless specifically identified with financing or investing.

Non-cash transactions and other disclosures

Investing and financing transactions that do not require the use of cash (such as acquiring assets by assuming liabilities directly, or converting debt to equity) are excluded from the statement but disclosed elsewhere. The components of cash and cash equivalents are disclosed and reconciled to the balance sheet. Ind AS 7 also requires disclosures that enable users to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes (a reconciliation of financing liabilities) — a disclosure that does not feature in AS 3.

A full worked example

Let's build the operating section using the indirect method — the most common approach. A company reports profit before tax of ₹12,00,000. It also has: depreciation ₹3,00,000, an increase in debtors of ₹2,00,000, an increase in creditors of ₹1,50,000, and it paid tax of ₹2,50,000. What is cash from operations?

The indirect method starts with profit and adjusts for non-cash items and working-capital changes.

Line	Working	Amount (₹)
Profit before tax	—	12,00,000
Add: depreciation (non-cash)	+3,00,000	15,00,000
Less: increase in debtors	−2,00,000	13,00,000
Add: increase in creditors	+1,50,000	14,50,000
Less: tax paid	−2,50,000	12,00,000
Net cash from operating activities	—	12,00,000

Each adjustment has a logic. Depreciation reduced profit but moved no cash, so it is added back. An increase in debtors means sales were booked but not yet collected — cash is lower than profit suggests, so it is subtracted. An increase in creditors means expenses were incurred but not yet paid — cash is higher than profit suggests, so it is added. The three sections then reconcile to the movement in the cash balance:

Section	Example items	Net (₹)
Operating	As above	12,00,000
Investing	Purchase of assets, investments	(varies)
Financing	Loans raised/repaid, dividends	(varies)

The value of the cash flow statement is that a company can report healthy accounting profit yet be starved of cash — typically because profit is locked up in rising debtors and inventory. Ind AS 7 forces that distinction into the open, which is why lenders and analysts often read it before the P&L.

How Ind AS 7 compares with AS 3

Ind AS 7 and AS 3 are conceptually very close — the same three-way classification, the same direct/indirect options, and the same notion of cash equivalents. The differences are at the margins: Ind AS 7 allows somewhat more flexibility in classifying interest and dividends (operating or financing/investing, consistently applied), and it requires the reconciliation of liabilities arising from financing activities, which AS 3 does not. Applicability also differs — under Ind AS the cash flow statement is an integral part of the complete set for all entities in scope, whereas the AS-framework requirement does not extend to every small enterprise.

Common pitfalls

Frequent issues include misclassifying flows between the three categories; netting investing or financing flows that should be gross; inconsistent classification of interest and dividends between periods; omitting significant non-cash transactions from disclosure; and failing to provide the financing-liabilities reconciliation.

Why this is cleaner on a unified system

A cash flow statement is only as good as the underlying transaction data, and it is far simpler to prepare when the ledger, banking, payables, receivables, and payroll all sit in one connected system. When every cash movement and every financing change is captured in a single source of truth, classifying flows and producing the reconciliations Ind AS 7 requires becomes a matter of querying one dataset rather than reassembling figures from separate tools.

This article is a detailed educational summary of Ind AS 7 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of Ind AS 7 as notified under the Companies Act before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.