The P&L account shows profit — but profit does not equal cash. A company can report strong profits while running out of cash (due to high debtors, inventory build-up, or capital expenditure), or report losses while generating strong operating cash flows (e.g., depreciation-heavy businesses like telecom or infrastructure).
Ind AS 7 mandates a Statement of Cash Flows as part of the complete financial statements. It helps users:
Warren Buffett famously prefers "owner earnings" (operating cash flows minus maintenance capex) over reported earnings — Ind AS 7 gives investors the data to compute this.
The statement reconciles the opening and closing balance of cash and cash equivalents, which include:
| Activity | Definition | Examples |
|---|---|---|
| Operating | Principal revenue-generating activities | Cash from customers, payments to suppliers, salaries, taxes paid |
| Investing | Acquisition/disposal of long-term assets and investments | Capex (PPE purchase), proceeds from asset sale, purchase/sale of investments |
| Financing | Changes in equity and borrowings | Share issue proceeds, loan repayments, dividends paid, interest paid on borrowings |
Every cash movement must be classified into one of these three buckets. The sum of the three gives the net change in cash during the period.
The indirect method starts with net profit (or loss) before tax and adjusts for non-cash items and working capital changes to arrive at cash generated from operations. It is the method used by the vast majority of Indian companies.
The logic: Depreciation reduces profit but is not a cash outflow (added back). Interest expense reduces profit but is classified under financing (added back here, then shown under financing outflows). An increase in debtors means profit was recognized but cash not yet received — so deducted from operating cash flows.
The direct method shows actual cash receipts from customers and actual cash payments to suppliers, employees, and others. Ind AS 7 encourages the direct method as it provides more useful information, but most companies use indirect because it is easier to prepare from accounting records.
Investing activities are cash flows from acquisition and disposal of long-term assets and investments (other than those held as trading securities or cash equivalents).
For most manufacturing and infrastructure companies, investing cash flows are significantly negative (net outflow) because capital expenditure exceeds asset disposal proceeds — this is healthy and expected for growing businesses.
Financing activities are cash flows resulting in changes to equity and borrowings of the entity.
One of the most debated areas of Ind AS 7 is the classification of interest received, interest paid, and dividends received/paid. The standard allows flexibility:
| Item | Permitted Classification | Common Indian Practice |
|---|---|---|
| Interest Paid | Operating OR Financing | Usually Financing |
| Interest Received | Operating OR Investing | Usually Investing |
| Dividends Paid | Operating OR Financing | Usually Financing |
| Dividends Received | Operating OR Investing | Usually Investing |
| Income Tax Paid | Operating (unless specific to financing/investing) | Operating |
For financial institutions (banks, NBFCs), interest paid and received are typically classified as operating activities since interest is the core business activity.
Investors derive several key metrics from the cash flow statement:
| Metric | Formula | Interpretation |
|---|---|---|
| Free Cash Flow (FCF) | Operating CF – Capex | Cash available after maintaining/growing asset base |
| Operating CF Margin | Operating CF ÷ Revenue | Cash generation efficiency; should trend with EBITDA margin |
| Cash Conversion | Operating CF ÷ Net Profit | >1x means quality earnings; <1x may signal aggressive accruals |
| Capex Intensity | Capex ÷ Revenue | Higher for capital-intensive sectors (telecom, metals) |
| FCF Yield | FCF ÷ Market Cap | Cash return on investment; comparable to earnings yield |
TCS is often cited as a benchmark for cash flow quality in India. Its FY25 cash flow statement illustrates a high-quality, asset-light IT services business:
TCS classifies interest received under Investing and dividends paid under Financing. The massive negative financing CF reflects the company's policy of returning substantially all free cash to shareholders.
APSEZ's FY25 cash flow statement tells a classic infrastructure growth story:
The negative FCF and reliance on debt financing is expected and sustainable for a port company with long-term concession revenues — investors track when FCF turns positive as growth capex peaks.
Zomato's FY25 cash flow statement marks a significant milestone in the company's evolution:
Zomato's transition to positive operating CF is a key milestone analysts tracked — it signals the business model is self-sustaining without needing continuous equity dilution.
Under Ind AS 116 (Leases), operating lease payments are no longer classified entirely as operating outflows. Instead:
This significantly changed operating cash flows for companies with large operating lease portfolios (retail, aviation, restaurants). Flipkart/Myntra's lease costs on warehouses shifted from operating to financing CF post-Ind AS 116 adoption.
Net profit is based on accrual accounting, which means it includes revenue recognized but not yet collected (debtors), and excludes cash payments for assets (capitalised as capex). Operating cash flow strips out these distortions and shows the actual cash the business generated.
Signs of earnings quality concerns: If a company consistently reports high profits but low operating cash flows, it could mean: (1) Revenue is being recognized aggressively while collections lag, (2) Expenses are being capitalized instead of expensed, (3) Inventory is building up without corresponding sales.
Example: Infrastructure companies like IL&FS reported profits for years while cash flows were negative — a warning sign missed by many analysts. Conversely, Indian IT companies like TCS and Infosys consistently show operating CF > net profit, indicating high earnings quality (low working capital, no inventory, fast collections).
For valuation, many analysts use EV/FCF (Enterprise Value to Free Cash Flow) rather than P/E, as it removes accounting distortions. Warren Buffett's "owner earnings" concept uses operating CF minus maintenance capex — directly computable from the cash flow statement.
This is a common practical question in India. Ind AS 7 requires cash flows to be reported on a gross basis as a general rule, but certain items (including agent collections) can be reported on a net basis.
GST collected from customers: GST collected is not income — it is a liability (collected on behalf of the government). Therefore, cash received from customers should be shown excluding GST in the direct method. If using the indirect method, starting from PBT automatically excludes GST since revenue is reported net of GST in P&L.
TDS deducted: When a customer deducts TDS before paying, the actual cash received is net of TDS. The TDS amount is credited to the company's tax account. In cash flows: the cash receipt is the actual amount received (net of TDS), and the TDS recoverable is treated as a reduction in taxes paid rather than as cash received.
Refund of excess TDS/GST: Tax refunds received are typically classified as operating activities (since income taxes paid are operating). GST refunds (common for exporters with accumulated ITC) are also typically operating.
Non-cash transactions are investing or financing activities that do not require cash flows and therefore must be excluded from the main cash flow statement. However, Ind AS 7 requires these to be disclosed elsewhere in the financial statements (usually in Notes) so that users understand the full financing and investing activities.
Common non-cash transactions in India:
The disclosure ensures users can reconstruct the full picture of capital allocation even for non-cash items. Ind AS 7 para 43 specifically requires disclosure of significant non-cash investing and financing activities.