In this guide · 9 sections
- Who must prepare it, and who may leave it out
- Operating, investing, financing: the AS 3 classification
- Indirect method or direct method
- Worked example: indirect method, tied to the balance sheet
- Non-cash transactions
- Items that commonly go wrong
- Checks that the statement ties to the balance sheet
- FAQs
- Sources
- Section 2(40) lets a one person company, small company or dormant company leave out the cash flow statement. A private company recognised as a start-up gets the same relief through G.S.R. 583(E), but only if it has not defaulted in filing its financial statements or annual return.
- SMC status does not exempt a company. AS 3 in the Companies (Accounting Standards) Rules, 2021 carries no SMC relaxation, so an SMC that is not also small, an OPC, dormant or an eligible start-up prepares the statement.
- For a non-financial company, AS 3 puts interest paid and dividends paid in financing, interest and dividends received in investing, and taxes on income in operating unless specifically identified with investing or financing.
- Common errors: treating a cash credit or overdraft as cash, treating a deposit of more than three months as a cash equivalent, reading current maturities as a working capital item, and leaving capital creditors in the payables movement.
- The closing figure must agree to the AS 3 sub-head of cash and cash equivalents, not to total cash and bank balances. Paragraph 42 requires the components and a reconciliation.
Try SignReady: An editable cash flow draft from the trial balances, unless exempt.
Start freeThe cash flow statement is often the last sheet built on a file, and it often balances only because someone has pushed the difference into "other current liabilities". A cash credit gets treated as negative cash. A one-year fixed deposit sits inside closing cash, and the new machine's unpaid invoice inflates operating cash flow. Each of these can leave the sheet adding up while the classification is wrong. This guide covers who must prepare the statement, how AS 3 classifies cash flows, a complete indirect method example that agrees to the balance sheet, and the checks to run before signing. Law as at 31 October 2026; figures are illustrative. It is part of our Schedule III guide and deals with companies following Division I, where Schedule III sets no cash flow format and AS 3 governs.
Who must prepare it, and who may leave it out
Section 2(40) lists the cash flow statement as part of the financial statements. Its proviso relaxes this for three kinds of company. A notification under section 462 extends the relief to a fourth.
| Company | Cash flow statement | Basis and what to check |
|---|---|---|
| One person company | May be left out | Proviso to s.2(40) |
| Small company | May be left out | Proviso to s.2(40), read with s.2(85). Test status under the current small company limits |
| Dormant company | May be left out | Proviso to s.2(40). Check that the company holds dormant status under s.455; being inactive in fact is not enough |
| Private company that is a start-up | May be left out if the filing condition is met | G.S.R. 583(E), 13 June 2017. It must be recognised under the notification of the Department of Industrial Policy and Promotion (now DPIIT), and must not have defaulted in filing under s.137 or s.92. Recognition has time and turnover limits under DPIIT's notification, so confirm it held for the year |
| Small and Medium Sized Company (SMC) with none of the statuses above | Required | AS 3 has no SMC relaxation in the 2021 Rules |
| Any other company | Required | s.2(40); AS 3, para 1 |
Three points are worth a line in the working paper.
- The SMC position. Older notes still say SMCs are exempt from AS 3. The 2021 text does not support that. AS 17 carries an express statement that it is not mandatory for SMCs. AS 3 carries none, and its opening note mentions only one person, small and dormant companies. ICAI's compendium lists AS 3 among the standards applicable in their entirety to companies. The SMC test (turnover up to ₹250 crore, borrowings up to ₹50 crore, and the other conditions in rule 2(1)(e)) therefore does not help here.
- The filing condition. Paragraph 2A, inserted by G.S.R. 583(E), applies to the exceptions in that notification, so the start-up route depends on clean filings. The Act's own proviso for one person, small and dormant companies has no such condition.
- A company that stops being small. AS 3 para 1 requires the statement for each period presented. General Instruction 1.2 gives relief on comparatives only to a company ceasing to be an SMC, and nothing equivalent covers loss of small company status. The safer course is to prepare the previous-year column too, which needs the balance sheet from two year ends back. Plan for this early, along with the other previous-year figures.
"May not include" is a permission. An exempt company can still present the statement if a lender or investor asks for it, and it then follows AS 3. For non-company entities, ICAI's text of AS 3 says it is not mandatory for micro, small and medium sized entities, though they are encouraged to comply. See our guide to non-corporate financial statements.
Operating, investing, financing: the AS 3 classification
| Item (non-financial company) | Activity | AS 3 |
|---|---|---|
| Receipts from customers; payments to suppliers and employees | Operating | Para 12 |
| Taxes on income, shown separately | Operating, unless specifically identified with investing or financing | Paras 34, 35 |
| Fixed assets bought and sold, including capitalised development cost; the gain or loss stays out of operating cash | Investing | Paras 13, 15 |
| Investments not held for trading; loans to third parties | Investing | Para 15 |
| Interest and dividends received | Investing | Para 30 |
| Shares issued; borrowings taken and repaid | Financing | Para 17 |
| Interest paid, including interest capitalised under AS 16 | Financing | Paras 30, 31 |
| Dividends paid | Financing | Paras 30, 33 |
| Instalment on an asset bought on deferred payment terms | Interest element financing; loan element investing | Para 10 |
Paragraph 32 records that there is no consensus on interest classification for non-financial enterprises, yet paragraph 30 states how these items should be classified, which settles the answer under Indian AS 3. Ind AS 7 and overseas statements may look different, so do not copy them. For a financial enterprise, interest paid and interest and dividends received are operating.
Indirect method or direct method
Paragraph 18 allows either method for operating activities, and investing and financing are shown as gross receipts and payments, apart from the net-basis cases in paras 22 and 24 (para 21). The direct method lists major classes of gross receipts and payments, and paragraph 19 considers it more appropriate because it gives information the indirect method does not. The indirect method starts from profit and adjusts it for non-cash items, for items whose cash effect is investing or financing, and for changes in inventories and operating receivables and payables (para 20).
Both give the same net operating cash flow. In practice most statements on a small file use the indirect method, because it can be built from the trial balance and the two balance sheets. AS 3's own Illustration I starts the indirect format from net profit before taxation, which is why tax appears only once, as tax paid, and deferred tax needs no add-back.
SignReady generates an editable Excel draft from the trial balances, with a cash flow statement unless exempt and previous-year figures. With opening balances and the year's debits and credits in the TB, it shows term loans taken and repaid in the cash flow.
Worked example: indirect method, tied to the balance sheet
Example Pvt Ltd is a wholly owned subsidiary, so it cannot be a small company. Year ended 31 March 2026, all figures illustrative.
| Balance sheet extract (₹) | 31 March 2026 | 31 March 2025 |
|---|---|---|
| Share capital | 80,00,000 | 60,00,000 |
| Reserves and surplus | 57,40,000 | 32,20,000 |
| Long-term borrowings | 36,00,000 | 32,00,000 |
| Deferred tax liability | 3,30,000 | 3,00,000 |
| Short-term borrowings: current maturities | 11,00,000 | 8,00,000 |
| Short-term borrowings: cash credit | 12,50,000 | 9,00,000 |
| Trade payables | 25,40,000 | 22,00,000 |
| Other current liabilities: capital creditors | 3,00,000 | 1,00,000 |
| Other current liabilities: interest accrued | 60,000 | 40,000 |
| Other current liabilities: statutory dues and expenses | 6,90,000 | 6,00,000 |
| Provision for tax (net of advance tax) | 2,00,000 | 1,50,000 |
| Total | 2,38,10,000 | 1,75,10,000 |
| Property, plant and equipment (net) | 99,60,000 | 80,00,000 |
| Non-current investments | 10,00,000 | 10,00,000 |
| Inventories | 33,00,000 | 28,00,000 |
| Trade receivables | 41,50,000 | 36,00,000 |
| Short-term loans and advances | 5,20,000 | 4,00,000 |
| Cash and cash equivalents | 39,55,000 | 12,00,000 |
| Other bank balances (deposits over three months) | 9,00,000 | 5,00,000 |
| Interest accrued on deposits | 25,000 | 10,000 |
| Total | 2,38,10,000 | 1,75,10,000 |
From the P&L and ledgers:
- Profit before tax ₹42,00,000, after depreciation ₹14,00,000, finance costs ₹6,80,000, interest income ₹1,20,000, dividend income ₹40,000 and profit on sale of machinery ₹60,000. Current tax ₹11,50,000, deferred tax ₹30,000, profit after tax ₹30,20,000. Dividend paid ₹5,00,000.
- Machinery bought ₹30,00,000, of which ₹3,00,000 is unpaid at the year end. Last year's capital creditors of ₹1,00,000 were paid.
- A vehicle of ₹6,00,000 was acquired on deferred payment terms from the dealer, with no cash paid at purchase. A principal instalment of ₹1,00,000 was paid during the year.
- Machinery with a written-down value of ₹2,40,000 was sold for ₹3,00,000.
- A new term loan of ₹10,00,000 was drawn and ₹8,00,000 of term loans repaid. Shares of ₹20,00,000 were issued for cash.
- Deposits over three months: ₹5,00,000 matured and ₹9,00,000 placed.
| Cash flow statement, year ended 31 March 2026 (₹) | Amount | Subtotal |
|---|---|---|
| A. Operating activities | ||
| Profit before tax | 42,00,000 | |
| Add: depreciation | 14,00,000 | |
| Add: finance costs | 6,80,000 | |
| Less: interest income | (1,20,000) | |
| Less: dividend income | (40,000) | |
| Less: profit on sale of machinery | (60,000) | |
| Operating profit before working capital changes | 60,60,000 | |
| Increase in inventories | (5,00,000) | |
| Increase in trade receivables | (5,50,000) | |
| Increase in short-term loans and advances | (1,20,000) | |
| Increase in trade payables | 3,40,000 | |
| Increase in other current liabilities (statutory dues and expenses) | 90,000 | |
| Cash generated from operations | 53,20,000 | |
| Income tax paid (1,50,000 + 11,50,000 − 2,00,000) | (11,00,000) | |
| Net cash from operating activities | 42,20,000 | |
| B. Investing activities | ||
| Purchase of fixed assets (30,00,000 + 1,00,000 − 3,00,000) | (28,00,000) | |
| Principal instalment on vehicle bought on deferred terms | (1,00,000) | |
| Proceeds from sale of machinery | 3,00,000 | |
| Deposits over three months placed | (9,00,000) | |
| Deposits over three months matured | 5,00,000 | |
| Interest received (10,000 + 1,20,000 − 25,000) | 1,05,000 | |
| Dividends received | 40,000 | |
| Net cash used in investing activities | (28,55,000) | |
| C. Financing activities | ||
| Proceeds from issue of shares | 20,00,000 | |
| Term loan drawn | 10,00,000 | |
| Term loans repaid | (8,00,000) | |
| Net increase in cash credit | 3,50,000 | |
| Interest paid (40,000 + 6,80,000 − 60,000) | (6,60,000) | |
| Dividend paid | (5,00,000) | |
| Net cash from financing activities | 13,90,000 | |
| Net increase in cash and cash equivalents (A + B + C) | 27,55,000 | |
| Cash and cash equivalents at the beginning of the year | 12,00,000 | |
| Cash and cash equivalents at the end of the year | 39,55,000 | |
| Note: components and reconciliation, para 42 (₹) | 31 March 2026 | 31 March 2025 |
|---|---|---|
| Cash on hand | 1,35,000 | 1,10,000 |
| Balances with banks in current accounts | 30,20,000 | 10,90,000 |
| Deposits with original maturity of three months or less | 8,00,000 | — |
| Cash and cash equivalents, as in the statement | 39,55,000 | 12,00,000 |
| Other bank balances (not cash equivalents) | 9,00,000 | 5,00,000 |
| Cash and bank balances on the balance sheet | 48,55,000 | 17,00,000 |
A further note covers the non-cash transaction: vehicle of ₹6,00,000 acquired on deferred payment terms; only the instalments paid appear in the statement. This example ignores TDS on deposit interest. Where it matters, follow Illustration I to AS 3, which shows dividends received net of TDS within investing and takes the TDS out of the operating tax paid figure.
Non-cash transactions
Investing and financing transactions that use no cash or cash equivalents stay out of the statement and are disclosed elsewhere in the financial statements (para 40). AS 3's examples are assets acquired by assuming directly related liabilities, an enterprise acquired by issuing shares, and debt converted to equity (para 41). Bonus shares also move no cash, and reserves and capital simply offset. The vehicle above fits the first example. It adds ₹6,00,000 to both fixed assets and borrowings, and neither figure appears in the statement.
Where a bank pays a dealer direct under a vehicle loan, the company likewise never holds the cash. AS 3 does not address this arrangement in terms. One reasonable presentation treats the drawdown as non-cash and shows repayments as repayments of borrowings in financing (para 17). Decide the presentation, apply it consistently and disclose the amount.
Items that commonly go wrong
| Item | The slip | What to do |
|---|---|---|
| Bank overdraft, cash credit | Netted against bank balances as "cash" | AS 3 defines cash as cash on hand and demand deposits, and has no overdraft provision like Ind AS 7. Show it in financing. Firms commonly show the net movement, relying on para 22(b) for quick-turnover, short-maturity items. AS 3 does not name cash credit, and its example in para 23 is borrowings of three months or less, so this is a judgement to record. In the example, netting would give closing cash of ₹27,05,000, which matches nothing on the balance sheet |
| Book overdraft | Ignored or netted against bank | If it is shown in other current liabilities, its movement must appear somewhere in the statement. Record where, and keep it consistent |
| Fixed deposits over three months | Counted in closing cash | The three-month test runs from the date of acquisition (para 6). Placements and maturities are investing. In the example, including them would show ₹48,55,000 against an AS 3 sub-head of ₹39,55,000. The classification itself is in cash and cash equivalents under Schedule III |
| Current maturities | Movement treated as working capital, or as a loan repaid | A reclassification moves no cash. Roll long-term borrowings and current maturities together. In the example, ₹40,00,000 + 10,00,000 − 8,00,000 + 6,00,000 − 1,00,000 = ₹47,00,000, which is 36,00,000 + 11,00,000 |
| Capital creditors, capital advances | Left in the payables or advances movement | Take them out of working capital and adjust the purchase of fixed assets. Otherwise, in the example, operating cash is overstated and capex overstated by ₹2,00,000 |
| Interest accrued | Finance cost shown as interest paid | Adjust for opening and closing interest accrued, and add any interest capitalised (para 31) |
| Margin money, earmarked balances | Left in cash | These are other bank balances, and their movement falls outside cash. Disclose significant balances not available for use, with management's commentary, if they are within cash and cash equivalents (para 45) |
Checks that the statement ties to the balance sheet
Every balance sheet movement should land in exactly one place. In the example, total assets and liabilities each moved by ₹63,00,000, which is ₹35,45,000 in non-cash assets plus ₹27,55,000 in cash. A reviewer can trace the harder lines this way:
| Line | Movement (₹) | Where it goes |
|---|---|---|
| Fixed assets | 19,60,000 | 30,00,000 + 6,00,000 − 2,40,000 − 14,00,000 |
| Reserves and surplus | 25,20,000 | Profit after tax 30,20,000 less dividend 5,00,000 |
| Provision for tax | 50,000 | Current tax 11,50,000 less tax paid 11,00,000 |
| Capital creditors | 2,00,000 | Inside purchase of fixed assets, not working capital |
| Other bank balances | 4,00,000 | Deposits placed less matured, in investing |
Before the statement goes for review, confirm:
- Opening and closing cash agree to the "Cash and cash equivalents" sub-head for both years, and the opening figure agrees to last year's signed statement.
- Profit before tax agrees to the Statement of Profit and Loss, and each add-back agrees to its note (depreciation to the fixed asset schedule, interest to finance costs).
- Fixed asset additions and disposals agree to the schedule, with the cash figure reconciled through capital creditors and advances.
- Borrowings taken and repaid roll forward from the opening to the closing total, including current maturities.
- Interest and dividends are not left in operating, and tax paid is shown separately.
- No unexplained "other" line. Any balancing figure means a movement has been missed.
- Components, the composition policy (para 43) and non-cash transactions are disclosed.
- Previous-year figures are presented on the same basis, and the statement was built after the final adjustments, not before.
SignReady's editable Excel draft includes a cash flow statement unless exempt, and these checks remain the firm's to carry out on the final figures.
Try SignReady: Term loans taken and repaid shown where the TB has the year's movements.
Start freeFrequently asked questions
Is a cash flow statement mandatory for a small company?
No. The proviso to section 2(40) of the Companies Act, 2013 says the financial statements of a one person company, small company or dormant company may not include the cash flow statement. It is a permission, so a small company can still present one, and then AS 3 applies.
Is an SMC exempt from AS 3?
No. The Companies (Accounting Standards) Rules, 2021 give SMCs relaxations in several standards, and AS 17 is expressly not mandatory for them, but AS 3 carries no SMC relaxation. An SMC prepares the statement unless it is also a one person company, small company, dormant company or eligible start-up.
Is a start-up company exempt from the cash flow statement?
A private company recognised as a start-up under the DPIIT notification may leave it out under G.S.R. 583(E) of 13 June 2017. The relief applies only if the company has not defaulted in filing its financial statements under section 137 or its annual return under section 92.
Under AS 3, is interest paid operating or financing?
For a company that is not a financial enterprise, interest paid is a financing cash flow, and interest and dividends received are investing cash flows. Dividends paid are financing. For a financial enterprise, interest paid and interest and dividends received are operating. Total interest paid is disclosed even if capitalised.
Is a bank overdraft part of cash and cash equivalents under AS 3?
No. AS 3 defines cash as cash on hand and demand deposits with banks, and it has no provision like Ind AS 7 for treating overdrafts as part of cash. An overdraft or cash credit is a borrowing, shown under short-term borrowings, and its movement is shown in financing activities.
Is a fixed deposit over three months a cash equivalent?
Normally not. AS 3 treats an investment as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Longer deposits are other bank balances, their placement and maturity are investing cash flows, and they are shown as reconciling items in the cash note.
Sources
- Companies (Accounting Standards) Rules, 2021, G.S.R. 432(E), 23 June 2021 (Gazette): rule 2(1)(e), General Instruction 1 of the Annexure, AS 3 Cash Flow Statements paras 1-48 and Illustration I, and the SMC statement in AS 17
- Companies Act, 2013, sections 2(40), 2(85), 137, 92, 455 and 462; Schedule III Division I (India Code)
- MCA notification G.S.R. 583(E), 13 June 2017: exemptions to private companies, serial number 1 (clause (40) of section 2) and paragraph 2A (Gazette)
- ICAI, Guidance Note on Division I, Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 6.4, 6.5, 8.3.1.10 and 8.3.1.11
- ICAI, AS 3 Cash Flow Statements (Accounting Standards, Volume III): preamble on non-company entities
- ICAI, Appendix I to the Compendium of Accounting Standards: applicability to companies and SMC relaxations
In SignReady, the draft Balance Sheet, Statement of Profit and Loss, cash flow statement (unless exempt) and notes come from the trial balances as an editable Excel workbook for the firm to review. First 3 finalisations free.
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Version history: 7 Nov 2026 — first published.
