## Cash Flow Statement — Indirect Method (Core Framework)
### Why the Indirect Method?
Most companies do not separately track every cash receipt and payment by category. The indirect method starts from Profit Before Tax (PBT) — which is already in the books — and strips out non-cash and non-operating items to arrive at true operating cash flow.
---
### Step 1 — Derive PBT When Not Directly Given
Open the P&L / Reserves ledger in your mind:
| Dr side (P&L A/c) | Cr side (P&L A/c) |
|---|---|
| Provision for Tax (charged) | Opening P&L balance |
| Transfer to General Reserve | PBT ← balancing figure |
| Dividend declared (current year) | |
| Closing P&L balance |
> Formula: PBT = Closing P&L + Prov for Tax + Transfer to Reserves + Div Declared (current yr) − Opening P&L
Illustration 7 check: Closing PIL ₹40,000 + Transfer to GR ₹50,000 + Prov Tax ₹80,000 − Opening PIL ₹0 = PBT ₹1,70,000 ✓
(No dividend was declared in the current year — only last year's declared dividend was paid in cash this year.)
---
### Step 2 — Cash Flow from Operating Activities
```
PBT ₹ X
Add: Non-cash charges
Depreciation + X
Provisions created (not paid) + X
Less: Non-operating income
Profit on sale of fixed assets − X
Dividend / interest received (if Inv) − X
Add: Non-operating expense
Interest on borrowings (if Fin) + X
────────
Operating Profit before WC changes ₹ X
± Changes in Working Capital
Increase in Current Liabilities (TP, Accruals) + X
Decrease in Current Assets (TR, Inventory) + X
Increase in Current Assets − X
Decrease in Current Liabilities − X
────────
Cash generated from operations ₹ X
Less: Income Tax Paid (actual cash) − X
────────
Net Cash from Operating Activities ₹ X
```
> Working Capital Sign Rule: More debtors = cash tied up = negative. More creditors = cash saved = positive.
---
### Step 3 — Cash Flow from Investing Activities
| Item | Sign |
|---|---|
| Sale proceeds of fixed assets (NOT profit) | + |
| Purchase of fixed assets | − |
| Sale of investments | + |
| Purchase of investments | − |
| Interest / dividend received (if classified here) | + |
> Key error trap: Use actual sale proceeds in investing (not profit on sale). The profit/loss is reversed in operating adjustments.
---
### Step 4 — Cash Flow from Financing Activities
| Item | Sign |
|---|---|
| Issue of equity / preference shares | + |
| Issue of debentures | + |
| Redemption of preference shares | − |
| Repayment of debentures | − |
| Dividend paid (actual cash, not declared) | − |
| Interest paid on borrowings (if classified here) | − |
---
### Dividend: Declared vs Paid — The Critical Distinction
| Situation | PBT Derivation | Cash Flow |
|---|---|---|
| Dividend declared in current year | Add to Dr side of P&L → increases computed PBT | Show as outflow in Financing when actually paid |
| Dividend paid (declared in prior year) | Do NOT add — it was already a liability | Show outflow via Dividend Payable ledger workings |
---
### Format: Final Reconciliation
```
Net CF from Operating Activities ₹ A
Net CF from Investing Activities ₹ B
Net CF from Financing Activities ₹ C
──────
Net increase / (decrease) in CCE ₹ A+B+C
Opening Cash & Cash Equivalents (CCE) ₹ X
──────
Closing Cash & Cash Equivalents ₹ Y
```