Microlesson · 5-min read

AS 3 – Cash Flow Statement: Direct Method

## Cash Flow Statement – Direct Method (AS 3)

### Overview

A Cash Flow Statement reports all inflows and outflows of cash and cash equivalents (CCE) during an accounting period, classified into three mutually exclusive activities.

### Three-Section Framework

Section	Focus	Typical Items
A. Operating (CFO)	Core revenue-generating operations	Receipts from debtors, payments to creditors, wages, overheads, tax
B. Investing (CFI)	Long-term asset acquisition/disposal	PPE purchase/sale, investment purchase/sale
C. Financing (CFF)	Capital structure changes	Share issue, loan drawdown/repayment, debenture redemption, dividend paid

Closing CCE = Opening CCE + Net CF (A + B + C)

---

### A. Cash Flow from Operating Activities (Direct Method)

```

Cash received from Trade Receivables ₹ XXX

Less: Cash paid to Trade Payables (XXX)

Less: Salaries / Wages paid (XXX)

Less: Overheads / Other expenses paid (XXX)

─────────

Cash generated from operations XXX

Less: Income Tax paid (XXX)

─────────

Net Cash Flow from Operating Activities (A) XXX

```

> Rule: Use actual cash received/paid, never accrual-basis figures. Derive cash from debtors and cash to creditors using T-accounts when not directly given.

---

### B. Cash Flow from Investing Activities

```

Less: Purchase of PPE (XXX)

Less: Purchase of Investments (XXX)

Add: Proceeds from sale of PPE XXX

Add: Proceeds from sale of Investments XXX

─────────

Net Cash Flow from Investing Activities (B) (XXX)

```

---

### C. Cash Flow from Financing Activities

```

Add: Proceeds from issue of shares XXX

Add: New loans / debentures raised XXX

Less: Repayment of bank loans (XXX)

Less: Redemption of debentures (XXX)

Less: Dividends paid (XXX)

Less: Interest paid (if classified here) (XXX)

─────────

Net Cash Flow from Financing Activities (C) XXX

```

---

### Final Reconciliation

```

Net CF during the year (A + B + C) XXX

Add: Opening CCE XXX

─────────

Closing CCE XXX

```

### Classification Quick Reference

Item	Section	Direction
Income tax paid	CFO	Outflow
Dividend paid	CFF	Outflow
Interest paid	CFF (preferred)	Outflow
Purchase of PPE	CFI	Outflow
Issue of shares	CFF	Inflow
Loan repaid	CFF	Outflow

Worked example

### Example 1

Illustration 4 – Direct Method (₹)

A. Cash Flow from Operating Activities:

```

Cash received from Trade Receivables 3,50,000

Less: Payment to Trade Payables (90,000)

Less: Salary paid (25,000)

Less: Payment of overheads (15,000)

──────────

Cash generated from operations 2,20,000

Less: Income tax paid (55,000)

──────────

Net CFO (A) 1,65,000

```

B. Cash Flow from Investing Activities:

```

Proceeds from investments 70,000

Less: Purchase of PPE (4,00,000)

──────────

Net CFI (B) (3,30,000)

```

C. Cash Flow from Financing Activities:

```

Issue of shares 5,00,000

Less: Debentures redeemed (50,000)

Less: Bank loan repaid (2,50,000)

Less: Dividend paid (1,00,000)

──────────

Net CFF (C) 1,00,000

```

Reconciliation:

```

Net CF during year (A + B + C) (65,000)

Add: Opening CCE 80,000

──────────

Closing CCE 15,000

```

### Example 2

Question 4 – Direct Method (₹ in '000s)

A. Cash Flow from Operating Activities:

```

Cash received from Trade Receivables 2,783

Less: Cash paid to Trade Payables (2,047)

Less: Employee benefits expense (69)

Less: Overheads and other expenses (115)

─────────

Cash generated from operations 552

Less: Tax paid (243)

─────────

Net CFO (A) 309

```

B. Cash Flow from Investing Activities:

```

Less: Purchase of PPE (102)

─────────

Net CFI (B) (102)

```

C. Cash Flow from Financing Activities:

```

Issue of shares 300

Less: Loan repaid (250)

Less: Dividend paid (80)

─────────

Net CFF (C) (30)

```

Reconciliation:

```

Net CF during year (A + B + C) 177

Add: Opening CCE 35

─────────

Closing CCE 212

```

⚠️ Common exam mistakes

Using accrual-basis revenue or expense figures instead of actual cash received/paid — always convert using T-accounts or opening/closing balance adjustments
Including depreciation as a line item in the direct method CFO — depreciation is non-cash and does not appear anywhere in the direct method statement
Classifying dividend paid under CFO instead of CFF — dividend paid is always a financing outflow under AS 3
Netting receipts and payments rather than showing gross amounts — AS 3 requires separate gross disclosure for major classes
Forgetting to subtract income tax paid from CFO — it reduces the cash from operations figure

Bare-Act text Paragraphs 18, 26, 31 · AS 3 (Revised) – Cash Flow Statements, ICAI · click to expand

An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. The cash flow statement should report cash flows during the period classified by operating, investing and financing activities... Under the direct method, major classes of gross cash receipts and gross cash payments are disclosed.

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