---
title: "Cash Flow Statement Example: Indirect and Direct Method, Worked"
description: "A worked cash flow statement example in rupees: indirect and direct methods, AS 3 vs Ind AS 7 classification, working capital days, and who must prepare one."
canonical: https://luckpanda.app/blog/cash-flow-statement-example
author: "Dhrumil Barot"
author_bio: "Dhrumil is a small-business operations and compliance expert. Dhrumil built LuckPanda so small businesses can run invoicing, inventory, accounts and compliance in one place."
published: 2026-10-29
updated: 2026-10-29
category: "Accounting and finance"
keywords: "cash flow statement example"
language: en
---

# Cash Flow Statement Example: Indirect and Direct Method, Worked

A complete cash flow statement example for a small Indian company, prepared by the indirect and direct methods from a P&L and two balance sheets, with every line traced.

By [Dhrumil Barot](https://luckpanda.app/about#founder), Founder. Published 29 Oct 2026. Updated 29 Oct 2026. 5 min read.

**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](https://live.icai.org/bos/vcc/pdf/Cash_Flow_Statement.pdf) issued by the ICAI; [IAS 7](https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows/) 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:

| Section | What it covers | Typical lines |
| --- | --- | --- |
| Operating activities | Cash from the main business | Receipts from customers, payments to suppliers and staff, income tax paid |
| Investing activities | Buying and selling long-term assets and investments | Purchase of machinery, sale of a vehicle, interest and dividends received |
| Financing activities | Money from and to lenders and owners | Loans taken and repaid, share capital raised, interest paid, dividends paid |

"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**

| Item | ₹ |
| --- | --- |
| Revenue from operations | 50,00,000 |
| Less: cost of goods sold | (30,00,000) |
| Gross profit | 20,00,000 |
| Less: salaries, rent and other operating expenses | (9,00,000) |
| Less: depreciation | (2,00,000) |
| Less: interest on term loan | (1,00,000) |
| Profit before tax | 8,00,000 |
| Less: income tax expense | (2,00,000) |
| Net profit | 6,00,000 |

**Balance sheet items that changed**

| Item | 31 Mar 2025 | 31 Mar 2026 | Change |
| --- | ---: | ---: | ---: |
| Cash and bank | 1,50,000 | 4,00,000 | +2,50,000 |
| Trade receivables | 6,00,000 | 8,00,000 | +2,00,000 |
| Inventories | 5,00,000 | 6,50,000 | +1,50,000 |
| Machinery (gross) | 10,00,000 | 15,00,000 | +5,00,000 |
| Trade payables | 4,00,000 | 4,80,000 | +80,000 |
| Income tax payable | 50,000 | 70,000 | +20,000 |
| Term loan | 0 | 3,00,000 | +3,00,000 |

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)**

|  | ₹ | ₹ |
| --- | --- | --- |
| A. Cash flow from operating activities |  |  |
| Profit before tax |  | 8,00,000 |
| Add: depreciation | 2,00,000 |  |
| Add: interest expense (shown under financing) | 1,00,000 | 3,00,000 |
| Operating profit before working capital changes |  | 11,00,000 |
| Increase in trade receivables | (2,00,000) |  |
| Increase in inventories | (1,50,000) |  |
| Increase in trade payables | 80,000 | (2,70,000) |
| Cash generated from operations |  | 8,30,000 |
| Less: income tax paid |  | (1,80,000) |
| Net cash from operating activities |  | 6,50,000 |
| B. Cash flow from investing activities |  |  |
| Purchase of machinery |  | (5,00,000) |
| Net cash used in investing activities |  | (5,00,000) |
| C. Cash flow from financing activities |  |  |
| Term loan taken | 3,00,000 |  |
| Interest paid | (1,00,000) |  |
| Dividend paid | (1,00,000) |  |
| Net cash from financing activities |  | 1,00,000 |
| Net increase in cash and cash equivalents (A+B+C) |  | 2,50,000 |
| Cash and cash equivalents at 1 April 2025 |  | 1,50,000 |
| Cash and cash equivalents at 31 March 2026 |  | 4,00,000 |

### 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.

| Operating activities (direct method) | Working | ₹ |
| --- | --- | --- |
| Cash received from customers | 50,00,000 − 2,00,000 increase in receivables | 48,00,000 |
| Cash paid to suppliers | (30,00,000 + 1,50,000 inventory increase) − 80,000 payables increase | (30,70,000) |
| Cash paid for salaries, rent and other expenses | No accruals or prepayments | (9,00,000) |
| Cash generated from operations |  | 8,30,000 |
| Income tax paid | 2,00,000 − 20,000 | (1,80,000) |
| Net cash from operating activities |  | 6,50,000 |

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](https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows/) (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?

| Point | Indirect method | Direct method |
| --- | --- | --- |
| Starting point | Profit before tax | Cash receipts and payments |
| Data needed | P&L and two balance sheets | Same, or the cash book directly |
| Shows customer receipts? | No | Yes |
| Explains profit vs cash gap? | Yes, line by line | Needs a separate reconciliation |
| Common in Indian annual reports | Yes | Less common |
| Allowed under AS 3, Ind AS 7, IAS 7 | Yes | Yes |

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:

| Item | AS 3 (non-financial company) | Ind AS 7 / IAS 7 |
| --- | --- | --- |
| Interest paid | Financing | Operating or financing (choose one, apply consistently) |
| Interest received | Investing | Operating or investing |
| Dividends received | Investing | Operating or investing |
| Dividends paid | Financing | Financing or operating |
| Income tax paid | Operating, unless specifically identified with investing or financing | Same |

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:

| Measure | Working | Result |
| --- | --- | ---: |
| Receivable days | 8,00,000 ÷ 50,00,000 × 365 | 58 days |
| Inventory days | 6,50,000 ÷ 30,00,000 × 365 | 79 days |
| Payable days | 4,80,000 ÷ 31,50,000 purchases × 365 | 56 days |
| Cash conversion cycle | 58 + 79 − 56 | 81 days |
| Operating cash margin | 6,50,000 ÷ 50,00,000 | 13% |
| Capital spending as share of revenue | 5,00,000 ÷ 50,00,000 | 10% |
| Effective tax rate | 2,00,000 ÷ 8,00,000 | 25% |

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](https://luckpanda.app/modules/finance/payments), 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](https://www.livelaw.in/news-updates/mca-redefines-small-company-criteria-raises-paid-up-capital-cap-to-rs-10-crore-and-turnover-cap-to-rs-100-crore-312404)). 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](https://luckpanda.app/blog/profit-and-loss-account-format) and note profit before tax, depreciation, interest and tax.
2. Put the opening and closing [balance sheets](https://luckpanda.app/templates/balance-sheet-format) 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](https://luckpanda.app/modules/finance/reports), the ledger, payments and bank balances that feed this statement are already in one place.

## Questions

### What are the 3 types of cash flow?

Operating (from the main business), investing (buying and selling long-term assets and investments) and financing (loans, capital, interest and dividends to owners and lenders).

### Why is depreciation added back in a cash flow statement?

Depreciation reduces profit but involves no payment in the year; the cash left when the asset was bought, which appears under investing activities.

### Can operating cash flow be higher than net profit?

Yes. In the example, operating cash flow of ₹6,50,000 exceeds net profit of ₹6,00,000 because non-cash depreciation of ₹2,00,000 outweighed the cash tied up in working capital.

### What is the difference between a cash flow statement and a fund flow statement?

A cash flow statement tracks changes in cash and cash equivalents. A fund flow statement tracks changes in working capital. Indian companies prepare the cash flow statement under AS 3 or Ind AS 7; the fund flow statement is no longer a required statement.

### Is interest paid operating or financing?

Under AS 3, financing for non-financial companies. Under Ind AS 7, either operating or financing, as long as the choice is applied consistently.

### Do direct and indirect methods give the same answer?

Yes. Both give the same net cash from operating activities; only the presentation differs.

## More guides

- [Accounting Principles: The 12 Rules, With Examples](https://luckpanda.app/blog/accounting-principles)
- [Single Entry System of Bookkeeping: Meaning, Example and Rules](https://luckpanda.app/blog/single-entry-system-of-bookkeeping)
- [Delegated Authority Matrix: How to Build One (Template)](https://luckpanda.app/blog/delegated-authority-matrix)

## Related tools

- [Profit margin calculator](https://luckpanda.app/tools/profit-margin-calculator): Margin and markup from cost and price, or the price for a target margin.

## About the author

**Written by [Dhrumil Barot](https://luckpanda.app/about#founder)**, Founder. Dhrumil is a small-business operations and compliance expert. Dhrumil built LuckPanda so small businesses can run invoicing, inventory, accounts and compliance in one place. [LinkedIn](https://www.linkedin.com/in/bdhrumil) · [X](https://x.com/fyidhrumil)