Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 7 - Statement of Cash Flows

Indian equivalent: Ind AS 7 - Statement of Cash Flows

Objective and scope

IAS 7 requires a statement tracking the actual cash that flowed in and out during the period, classified into three activities, because profit and cash are not the same thing and a business is ultimately killed by running out of cash, not by low accrual profit.

Core principle

A company can be profitable on paper yet collapse from lack of cash. IAS 7 splits every cash movement into Operating, Investing and Financing buckets, so readers see exactly where cash came from and where it went - and whether the core business actually generates cash.

Defined terms and technical terminology

Term	Technical meaning
Cash and cash equivalents	Physical cash, bank balances, and short-term, highly liquid investments (typically maturing within 3 months) readily convertible to known amounts of cash with insignificant risk of value change.
Operating activities	Cash from the principal revenue-producing activities - collecting from customers, paying suppliers, staff, and taxes.
Investing activities	Cash from acquiring/disposing of long-term assets and investments - buying machinery, buildings, or other businesses.
Financing activities	Cash from owners and lenders - issuing shares, raising or repaying loans, paying dividends.
Direct method	Present actual gross cash receipts and payments (encouraged but rarely used).
Indirect method	Start from profit before tax and adjust for non-cash items and working-capital changes to derive operating cash (the common method).

Application and worked illustrations

Why cash flow matters even when profit looks good

TechStart Ltd reports a healthy ₹10 lakh profit. But all sales were on credit and customers have not paid, while it bought ₹8 lakh of equipment for cash. The profit statement smiles; the bank is nearly empty. IAS 7 exposes this: the Operating section shows little cash actually collected, and Investing shows the ₹8 lakh outflow. A lender reading this instantly sees the liquidity risk that profit alone hides.

The three buckets with a full example

Operating: received ₹5,00,000 from customers; paid ₹3,00,000 to suppliers and staff → net +₹2,00,000. Investing: bought a delivery van for ₹8,00,000 → −₹8,00,000. Financing: raised a ₹6,00,000 loan; paid ₹50,000 dividends → net +₹5,50,000. Total change = 2,00,000 − 8,00,000 + 5,50,000 = −₹50,000. So despite the reported profit, cash fell by ₹50,000 - a fact only the cash-flow statement reveals.

The indirect method, step by step

Start with profit before tax. Add back non-cash expenses - the biggest is depreciation (an accounting charge, no cash leaves) and amortisation, plus losses on asset sales. Remove non-operating items like interest and gains on disposal (shown under investing/financing). Then adjust for working-capital movements: an increase in receivables means less cash collected → subtract it; an increase in payables means you delayed paying → add it; an increase in inventory ties up cash → subtract it. The result is net cash from operating activities.

Example: profit before tax ₹4,00,000; depreciation ₹1,00,000 (add); receivables rose ₹50,000 (subtract); payables rose ₹30,000 (add); inventory rose ₹20,000 (subtract). Operating cash = 4,00,000 + 1,00,000 − 50,000 + 30,000 − 20,000 = ₹4,60,000.

Common mistake: classifying interest and dividends inconsistently year to year. IAS 7 allows choice (e.g., interest paid under operating or financing) but the classification must be consistent.

Common mistake: treating a bank overdraft as financing. If it is repayable on demand and part of cash management, it is included within cash and cash equivalents.

IND AS LINK

Ind AS 7 is substantially the same. Under the Companies Act, a cash-flow statement is mandatory for most companies; certain small companies, OPCs and dormant companies are exempted. Ind AS 7 also carries enhanced disclosure of changes in liabilities arising from financing activities.

Further worked illustrations

Extra numeric example - converting a credit sale year to cash

QuickServe reports revenue of ₹80,00,000 but its receivables rose from ₹10,00,000 to ₹22,00,000 during the year. Cash actually collected = opening receivables + sales − closing receivables = 10,00,000 + 80,00,000 − 22,00,000 = ₹68,00,000. So although the income statement shows ₹80 lakh of sales, only ₹68 lakh hit the bank - the ₹12 lakh rise in receivables is cash not yet collected, which the operating section of IAS 7 lays bare.

INDIAN REGULATORY CONTEXT

Indian companies commonly present interest and dividends received under investing activities and interest and dividends paid under financing, which is one of the permitted IAS 7 choices and aligns with the Schedule III cash-flow format most Indian auditors expect. The key is consistency year on year.

TECHNICAL EDGE CASE

A company buys machinery worth ₹30,00,000 by issuing shares to the seller instead of paying cash. This is a genuine investing and financing event, but no cash moved, so it appears nowhere in the cash-flow statement itself. IAS 7 requires it to be disclosed separately (usually in the notes) so readers aren't misled into thinking no significant investing/financing activity occurred.

Extended technical analysis

Classification architecture and the indirect method reconciliation

IAS 7 requires cash flows to be classified into operating, investing and financing activities. The classification is not cosmetic: analysts derive free cash flow, cash conversion and quality of earnings metrics from it, and misclassification (for example, presenting an operating outflow as investing) directly distorts those metrics.

Complete indirect-method format

Statement of Cash Flows - Indirect Method (₹ in lakhs)
Particulars	FY 2025-26	FY 2024-25
A. CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax	4,340	3,270
Adjustments to reconcile PBT to operating cash flows:
Depreciation and amortisation expense	2,260	2,110
Finance costs	1,180	1,240
Interest income	(310)	(275)
Dividend income	(85)	(60)
(Profit)/loss on sale of property, plant and equipment	(140)	35
Impairment loss on financial assets (ECL)	210	185
Share-based payment expense	320	290
Unrealised foreign exchange (gain)/loss	(75)	110
Operating profit before working capital changes	7,700	6,905
Movements in working capital:
(Increase)/decrease in trade receivables	(520)	(410)
(Increase)/decrease in inventories	(280)	195
Increase/(decrease) in trade payables	1,220	(150)
Increase/(decrease) in provisions and other liabilities	95	70
Cash generated from operations	8,215	6,610
Income taxes paid (net of refunds)	(1,240)	(935)
Net cash from operating activities (A)	6,975	5,675
B. CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment and intangibles	(3,480)	(2,940)
Proceeds from sale of property, plant and equipment	420	185
Purchase of investments	(1,150)	(880)
Proceeds from sale/maturity of investments	760	640
Acquisition of subsidiary, net of cash acquired	(1,200)	-
Interest received	295	262
Dividend received	85	60
Net cash used in investing activities (B)	(4,270)	(2,673)
C. CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of equity share capital	-	500
Proceeds from non-current borrowings	1,500	900
Repayment of non-current borrowings	(2,200)	(1,650)
Principal payment of lease liabilities	(365)	(340)
Interest paid	(1,145)	(1,205)
Dividends paid (including tax thereon)	(680)	(520)
Net cash used in financing activities (C)	(2,890)	(2,315)
Net increase/(decrease) in cash (A+B+C)	(185)	687
Cash and cash equivalents at beginning of year	1,870	1,183
Effect of exchange differences on cash held	625	-
Cash and cash equivalents at end of year	2,310	1,870

Classification of contentious items

Classification Matrix - Interest, Dividends and Taxes
Item	IFRS (IAS 7) permitted classification	Common Indian practice (Ind AS 7)
Interest paid	Operating or Financing	Financing
Interest received	Operating or Investing	Investing
Dividends received	Operating or Investing	Investing
Dividends paid	Operating or Financing	Financing
Income taxes paid	Operating, unless specifically identifiable with investing/financing	Operating
Bank overdraft repayable on demand	Included within cash and cash equivalents where integral to cash management	Same
Principal element of lease payment	Financing	Financing
Interest element of lease payment	Operating or Financing (policy choice)	Financing

Non-cash transactions and the financing liability reconciliation

Investing and financing transactions not requiring cash - acquisition of assets by assuming liabilities or by a lease, conversion of debt to equity, acquisition of an entity by share issue - are excluded from the statement of cash flows and disclosed separately. In addition, IAS 7.44A requires a reconciliation of movements in liabilities arising from financing activities, distinguishing cash flows from non-cash changes (acquisitions, foreign exchange, fair value changes).

Reconciliation of Liabilities from Financing Activities (IAS 7.44A)
Particulars	Opening	Cash flows	Non-cash: new leases	Non-cash: FX / other	Closing
Non-current borrowings	8,900	(700)	-	-	8,200
Current borrowings	1,320	130	-	-	1,450
Lease liabilities	3,150	(365)	180	(85)	2,880
Total	13,370	(935)	180	(85)	12,530

IFRS vs Ind AS - Comparative Analysis
Aspect	IFRS / IAS position	Ind AS position (carve-out / carve-in)
Method	IAS 7 permits direct or indirect; direct encouraged.	Ind AS 7 permits both, but the indirect method is near-universal in Indian practice.
Interest and dividends	Free policy choice among permitted classifications.	Ind AS 7 restricts the choice for non-financial entities: interest/dividends paid → financing; interest/dividends received → investing. This is an Indian carve-out.
Applicability	Required for all entities presenting IFRS statements.	Mandatory under the Companies Act; One Person Companies, small companies and dormant companies are exempt.
Bank overdrafts	Included in cash equivalents if integral to cash management.	Same treatment.