A company can earn a profit and still run short of cash. A cash flow statement explains why by showing cash movements from operating, investing and financing activities. For an Indian company, the first question is whether the statement is required. The second is which reporting standard applies.
The Companies Act position and the accounting framework must be checked separately. Most companies include a cash flow statement. Certain companies may use a statutory exemption. A company applying Indian Accounting Standards uses Ind AS 7; a company applying the Accounting Standards framework uses AS 3.
Applicability decision table
| Company position | Cash flow statement | Reporting framework |
|---|---|---|
| Company does not fall within an available exemption | Include it in the financial statements | Use AS 3 or Ind AS 7, according to the accounting framework applicable to the company. |
| One Person Company | May omit it under the proviso to section 2(40) | The relief is optional; the company may still prepare one. |
| Small company | May omit it if the company qualifies as a small company for that reporting period | Do not assume every private company is a small company. Check the current definition and exclusions. |
| Dormant company | May omit it while the statutory status applies | Confirm the company's actual status for the reporting period. |
| Private company recognised as a start-up | May use the separate private-company exemption when its conditions are met | Verify current start-up recognition and that the company has not defaulted in filing its financial statements or annual return. |
Section 2(40) includes the cash flow statement within financial statements and permits an OPC, small company or dormant company to omit it. ICAI's current AS 3 text also records this Companies Act position. The start-up relief comes from the private-company exemption notification. A Government of India summary of start-up measures confirms that an eligible private start-up may omit the statement.
The word “may” gives relief; it does not prohibit preparation. A lender, investor, group reporting package or internal policy may still require cash-flow information. If the company relies on an exemption, keep a short applicability note showing the category, supporting records and reporting period.
AS 3 or Ind AS 7?
| If the company applies | Use | Main presentation |
|---|---|---|
| Accounting Standards notified for companies | AS 3, Cash Flow Statements | Operating, investing and financing cash flows |
| Indian Accounting Standards | Ind AS 7, Statement of Cash Flows | Operating, investing and financing cash flows, with the requirements and disclosures in Ind AS 7 |
Do not prepare an Ind AS company's statement using AS 3 simply because both standards use the same three broad headings. ICAI's current 2025–26 Ind AS 7 text is the relevant standard for an Ind AS company.
If you need the classification rules and interest or dividend treatment under AS 3, use the related AS 3 operating, investing and financing guide. For a shorter explanation of how a cash flow statement connects to profit and the balance sheet, see the cash flow statement overview.
Cash and cash equivalents
Under AS 3, cash includes cash on hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments that can be converted into known amounts of cash and carry an insignificant risk of value changes. An investment normally qualifies only when it has a short maturity, such as three months or less from the date of acquisition.
“Easy to sell” is not enough. Check the purpose, original maturity, convertibility to a known amount and risk of value changes. Movements between cash and qualifying cash equivalents are cash-management movements, not operating, investing or financing cash flows.
Worked example: complete the reconciliation
Assume a trading company has profit before tax of ₹12 lakh. Depreciation is ₹2 lakh, receivables increase by ₹3 lakh and inventory decreases by ₹1 lakh. It buys machinery for ₹5 lakh in cash and receives a new term loan of ₹4 lakh. Ignore tax and all other items for this simplified example.
| Step | Calculation | Cash-flow effect |
|---|---|---|
| Operating cash before tax | ₹12 lakh + ₹2 lakh − ₹3 lakh + ₹1 lakh | ₹12 lakh inflow |
| Machinery purchase | Cash paid for a long-term asset | ₹5 lakh investing outflow |
| New term loan | Cash raised through borrowing | ₹4 lakh financing inflow |
| Net increase in cash | ₹12 lakh − ₹5 lakh + ₹4 lakh | ₹11 lakh |
Depreciation is added back because it reduced accounting profit without using cash. Higher receivables reduce operating cash because some recognised revenue remains uncollected. Lower inventory releases cash in this simplified illustration. The machinery purchase and loan are kept outside operating activities because their economic nature is investing and financing.
Preparation checklist
- Document applicability: identify the exact exemption, if any, and confirm that its conditions hold for the reporting period.
- Select the right standard: use AS 3 for the AS framework or Ind AS 7 for the Ind AS framework.
- Reconcile opening and closing balances: map cash, bank balances and qualifying cash equivalents to the balance sheet.
- Classify by economic nature: do not decide classification only from the ledger name or bank account used.
- Remove non-cash transactions: exclude transactions that change assets or liabilities without moving cash, and disclose them elsewhere when required.
- Check supporting schedules: reconcile fixed assets, investments, borrowings, equity and working-capital movements.
- Investigate differences: never use an unexplained balancing figure to force the statement to agree.
- Retain review evidence: keep the applicability note, mapping, calculations and final reconciliation with the financial-statement file.
Common mistakes
- Assuming that every private company is exempt.
- Forgetting the conditional start-up exemption.
- Using AS 3 for a company that reports under Ind AS.
- Treating every short-term investment or bank deposit as a cash equivalent.
- Showing a non-cash acquisition as a cash flow.
- Classifying an asset purchase as operating only because it passed through the normal bank account.
- Leaving the worked statement unreconciled to opening and closing cash and cash equivalents.
Start with applicability, then select the correct reporting framework and complete the reconciliation. That order prevents the two most basic errors: preparing the wrong statement for the company and forcing a cash-flow calculation that does not explain the movement in cash.
