Cash Flow Statement Example: Indirect and Direct Method, Worked

TL;DR: Below is a complete cash flow statement example for a small Indian company, built from its profit and loss account and two balance sheets, prepared both ways: the indirect method (start from profit, adjust) and the direct method (list cash received and paid). Both arrive at the same ₹6,50,000 of operating cash flow and the same ₹2,50,000 rise in cash, and every line is traced to its source so you can repeat it with your own numbers.

A cash flow statement example shows how a business's cash moved during a period, split into operating, investing and financing activities. In the example below, Kavya Foods Private Limited earned a net profit of ₹6,00,000 in FY 2025-26, generated ₹6,50,000 of cash from operations, spent ₹5,00,000 on equipment, raised a net ₹1,00,000 from financing, and ended the year with ₹2,50,000 more cash than it started with. The format follows AS 3, Cash Flow Statements issued by the ICAI; IAS 7 and Ind AS 7 use the same three sections.

What are the three sections and what goes in each?

A cash flow statement is built from three inputs: the profit and loss account for the year, the opening balance sheet and the closing balance sheet. It has three sections:

"Cash" includes cash equivalents: short-term, highly liquid investments with a maturity of three months or less from the date of acquisition, such as a fixed deposit of 60 days (a deposit of 180 days is an investing item instead).

Cash flow statement example: Kavya Foods' source figures, FY 2025-26

Profit and loss account, year ended 31 March 2026

Balance sheet items that changed

Other facts: all machinery bought for cash, no assets sold, interest fully paid in the year, and a dividend of ₹1,00,000 paid to shareholders.

Indirect method: the worked statement

The indirect method starts from profit before tax and removes everything that is not cash or not operating. It is the method most Indian companies use in their annual reports.

Kavya Foods Private Limited: cash flow statement for the year ended 31 March 2026 (indirect method)

Where does each adjustment come from?

• Depreciation +₹2,00,000: an expense in the P&L that used no cash.
• Interest +₹1,00,000: added back here because AS 3 puts interest paid under financing for a non-financial company; it reappears as an outflow in section C.
• Receivables −₹2,00,000 (up 33%): ₹2,00,000 of this year's sales were still unpaid at year end, so cash received was lower than revenue.
• Inventories −₹1,50,000 (up 30%): cash spent building stock that has not been sold yet.
• Payables +₹80,000 (up 20%): suppliers had not yet been paid for ₹80,000 of purchases, so cash stayed in the business.
• Income tax paid ₹1,80,000 (tax payable up 40%): tax expense ₹2,00,000 less the ₹20,000 increase in tax payable (2,00,000 − 20,000).

The check: closing cash in the statement (₹4,00,000) must equal the cash and bank balance on the closing balance sheet. If it does not, a balance sheet change has been missed.

Direct method: listing receipts and payments

The direct method lists actual cash received and paid in operating activities. Investing and financing sections are identical under both methods, so only section A changes.

Both methods give ₹8,30,000 of cash generated from operations and ₹6,50,000 of net operating cash flow. That is the rule: the methods differ in presentation, never in the total. IAS 7 (paragraph 19) encourages the direct method because it shows gross receipts and payments, which helps in forecasting.

Direct vs indirect method: which should you use?

Use the indirect method when you are preparing statutory accounts from a trial balance; it shows exactly why profit and cash differ. Use the direct method for monthly management reporting, where the owner wants to see how much customers actually paid.

How are interest and dividends classified?

Classification is the most common place people go wrong, and it differs between Indian GAAP and Ind AS:

For banks and NBFCs under AS 3, interest paid and received are operating, because lending is their main business.

What does this example tell the owner?

Kavya Foods made ₹6,00,000 profit but generated ₹6,50,000 of operating cash, a cash conversion of 108% (6,50,000 ÷ 6,00,000). Depreciation, a non-cash cost, more than offset the ₹2,70,000 tied up in working capital. Free cash flow, operating cash less capital spending, was ₹1,50,000 (6,50,000 − 5,00,000). The machinery was funded mostly from operations, and the ₹3,00,000 loan covered the dividend and interest with room to spare.

The balance sheet changes also convert into working capital days, which explain the ₹2,70,000 absorbed:

Every day cut from the 81-day cycle frees roughly ₹13,700 of cash (₹50,00,000 ÷ 365), a little more than one day of sales.

Three warning signs to look for in your own statement:

1. Receivables growing faster than revenue: here receivables rose 33% (6 to 8 lakh). If revenue grew less than that, customers are paying more slowly. Faster collection, for example through payment links on invoices, shows up directly in section A.
2. Negative operating cash flow with positive profit: profit exists on paper only; the business is funding customers or stock.
3. Financing inflows paying for operating outflows: loans used to cover losses rather than assets.

Is it mandatory for small companies?

No. Under section 2(40) of the Companies Act, 2013, a one person company, a small company and a dormant company may leave the cash flow statement out of their financial statements. From 1 December 2025, notification G.S.R. 880(E) raised the small company limits to paid-up capital up to ₹10 crore and turnover up to ₹100 crore, up from ₹4 crore and ₹40 crore (LiveLaw report). Many private companies that prepared one in FY 2024-25 are no longer required to. It is still worth preparing: banks assessing working capital limits ask for it, and it is the fastest way to see where profit went.

Sole proprietors and partnership firms have no statutory requirement, but the same three-section format works for them.

How do you prepare one from your own books?

1. Take the profit and loss account and note profit before tax, depreciation, interest and tax.
2. Put the opening and closing balance sheets side by side and compute the change in every line.
3. Classify each change: current assets and liabilities go to operating, fixed assets and investments to investing, loans, capital and dividends to financing.
4. Build section A, then B and C.
5. Check that opening cash plus net change equals closing cash.

If your books are in the LuckPanda Finance module, the ledger, payments and bank balances that feed this statement are already in one place.