Competitive Exams

IIT JEE, NEET, ESE, GATE, AE/JE, Olympiad

Only IAS

UPSC, State PSC

School Preparation

Foundation (Class 6-12), Commerce, Arts, CuriousJr (1st - 8th), Science, International Boards

Govt Exam

Judiciary, SSC, Defence, Teaching, JAIIB & CAIIB, BIHAR EXAMS WALLAH, UP Exams, Railway, Nursing Exams, Banking, WB Exams

UG & PG Entrance Exams

MBA, IPMAT, IIT JAM, LAW, CUET UG, UGC NET, GMAT, Design & Architecture, Pharma, CSIR NET, CUET PG, NEET PG

FINANCE

CA, CS, Finance Courses, ACCA

Others

English Wallah, Online Degrees

English Proficiency Test

IELTS, TOEFL

Agriculture

What Is Cash Flow? Definition, Uses and Classification

Here we learn about cash flow, its definition, various uses, and classifications. Understand the importance of cash flow in financial management and how it impacts business operations and personal finances.

Rahul Jaiswal19 Jun, 2024

What is Cash Flow?

The cash flow statement reveals the money coming in and going out, including cash equivalents. Companies use this statement to show users where their cash and equivalents are coming from and how they're being used over a certain period. It's become really important in recent years because it's so useful for anyone using financial information.

Utility of Cash Flow Analysis

Helps in efficient cash management
Helps in internal financial management
Discloses the movements of cash
Discloses success or failure of cash planning
Evaluate management decisions
Illustrate the connection between net income and changes in the business's cash flow.
Efficiency in cash management

Definition of Specific Terms Used in the Context of a Cash Flow Statement.

Cash: Cash comprises cash in hand and demand deposits with banks. Demand deposits mean those deposits Which are repayable by bank on demand by the depositor. Cash equivalents: Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts Of cash and Which are subject to an insignificant risk Of changes in value. Cash equivalents are held primarily to fulfill short-term cash obligations rather than for investment or other purposes. Examples Of cash equivalents are treasury bills, commercial paper etc. Investments in shares are not considered cash equivalents unless they essentially serve the same purpose, such as preference shares acquired shortly before their scheduled redemption date, with minimal risk of the company failing to repay the amount at maturity. Cash flows: Cash flows refer to the movement of cash and cash equivalents into and out of an organization. This includes cash coming into the organization and cash going out. The difference between cash inflows and outflows is termed net cash flow, which can either be a net cash inflow or a net cash outflow. Cash flows specifically exclude transfers between items that qualify as cash or cash equivalents because these movements are managed as part of the organization's cash management activities, rather than being categorized under operating, investing, or financing activities. Cash management activities also encompass investing excess cash in cash equivalents.

Also Read: Time Value of Money, Present and Future Value

Classification of Cash Flow Statement

Cash flow statements are classified into three main categories: cash flows from operating activities, investing activities, and financing activities. Each category represents different sources and uses of cash.

Cash Flows from Operating Activities	Examples Of Cash Flows from Operating Activities
Operating activities are the principal revenue producing activities of the enterprise and other activities that are not investing and financing activities Operating activities include cash effects of those transactions and events that impact the calculation of net profit or loss.	a) Cash received from selling goods and providing services; b) Cash receipts from royalties, fees, commissions. and other revenues: c) Cash payments made to suppliers for goods and services; d) Cash payments made to employees and on their behalf;

Cash Flows from Investing Activities		Examples Of Cash Flows from Investing Activities
Investing activities encompass the acquisition and sale of long-term assets and other investments that are not considered cash equivalents. In simpler terms, these activities involve transactions and events related to purchasing and selling long-term productive assets (such as land, buildings, and machinery) that are not intended for immediate resale, as well as other types of investments.		Cash payments for acquiring fixed assets (including intangible assets), which cover expenses like capitalized research and development costs and self-constructed fixed assets; cash receipts from selling fixed assets (including intangible assets); cash payments for purchasing shares, warrants, or debt instruments of other companies and interests in joint ventures (excluding instruments considered cash equivalents or held for trading); cash receipts from selling shares, warrants, or debt instruments of other companies and interests in joint ventures (excluding instruments considered cash equivalents or held for trading); cash advances and loans extended to third parties (excluding those made by financial institutions); cash receipts from the repayment of advances and loans made to third parties (excluding those received by financial institutions); cash flows related to futures contracts, forward contracts, option contracts, and swap contracts, unless these contracts are held for trading purposes or classified as financing activities

Cash Flows from Financing Activities		Examples Of Cash Flows from Financing Activities
Financing activities involve transactions that affect the size and structure of the owners' capital (including preference share capital for companies) and the borrowings of the enterprise.		a) Cash received from issuing shares or similar financial instruments; b) cash proceeds from issuing debentures, Loans notes. bonds and other short-term borrowing: c) cash repayments of amounts borrowed i.e redemption of debentures. bonds etc.: d) cash payments to redeem preference shares; e) payment of dividend.

Treatment of Interest and Dividend

	Non -Financial Enterprises
Interest paid	Interest received	Dividend Paid	Dividend received
Financing Activities	Investing Activities	Financing Activities	Investing Activities
	Financial Enterprises
Interest paid	Interest received	Dividend Paid	Dividend received
Operating Activities	Operating Activities	Financing Activities	Operating Activities

Preparation of a Cash Flow Statement:

Cash Flow Statement	(Rs)
A. Cash flows from operating activities
B. Cash flows from investing activities
C. Cash flows from financing activities
Net increase (decrease) in cash and cash equivalents (A + B + C)
+ Cash and cash equivalents at the beginning
= Cash and cash equivalents at the end

Cash Flows from Operating Activities

Direct Method: Here are some typical examples of cash receipts and cash payments generated by operating activities:

Cash sales of goods and services;
Cash collected from debtors (customers);
Cash receipts of interest or dividends;
Cash receipts of royalties, fees, commission and other revenues;
Cash payments to suppliers (creditors);
Cash payments for various operating expenses i.e. rent, rates, power etc..
Cash payments for wages and salaries to employees;
Cash payments for income tax etc.

Some of the items to be shown in the cash flow statement are illustrated below:

Collections from Customers:

Cash Collected from Debtors = Credit Sales + Decrease in Accounts Receivable or - Increase in Accounts Receivable.

Payment to Suppliers:

Purchases = Cost of Goods Sold + Closing Stock - Opening Stock OR Purchases = Cost of Goods Sold + Increase in Stock or - Decrease in Stock Cash Paid to Suppliers = Purchases + Opening Balance of Creditors (Bills Payable) - Closing Balance of Creditors (Bills Payable). OR Cash Paid to Suppliers = Purchases + Decrease in Accounts Payable or - Increase in Accounts Payable.

Payment to Employees:

Cash Paid for Wages and Salaries = Wages and Salaries Expenses + Opening Balance of Outstanding Wages and Salaries - Closing Balance of Outstanding Wages and Salaries. OR Cash Paid for Wages and Salaries = Wages and Salaries Expenses + Decrease in Wages and Salaries Payable or - Increase in Wages and Salaries Payable.

Rent Received:

Rent Received = Rent Revenue + Opening Balance of Rent Receivable - Closing Balance of Rent Receivable. OR Rent Received = Rent Revenue + Decrease in Rent Receivable or - Increase in Rent Receivable.

Interest Paid:

Interest Paid = Interest Expenses + Opening Balance of Outstanding Interest - Closing Balance of Outstanding Interest. OR Interest Paid = Interest Expenses + Decrease in Interest Payable, or - Increase in Interest Payable

Insurance:

Cash Paid for Insurance = Insurance Expenses + Closing Balance of Unexpired Insurance - Opening Balance of Unexpired Insurance. OR Cash Paid for Insurance = Insurance Expenses + Increase in Unexpired Insurance or - Decrease in Unexpired Insurance

Indirect Method

A summary of adjustments required to convert the net profit to net cash flow from operating activities through indirect method is as follows:

	Particulars	Amount (RS.)
	A. Net profit before tax and extraordinary item B. Adjustments for non-cash and non-operating items: Add: Amount written off in respect of depreciation, goodwill, preliminary expenses, underwriting commission etc. Add/Less: Other non-operating items C. Adjustments for gains and losses from the sale of fixed assets and investments: Add. Loss on sale of fixed assets/investments Less: Profit on sale of fixed assets/ Investments D. Adjustments for changes in current assets (excluding cash and cash equivalents) and current liabilities (excluding bank overdrafts) Add: Decrease in accounts of current assets e.g. debtors, bill receivable, stock, prepaid expenses etc. Less: Increase in accounts of current assets. Add: Increase in accounts of current liabilities; e.g., creditors, bills pa gable, outstanding expenses, etc. Less: Decrease in accounts of current liabilities. E. Cash generated from operations Less: Income tax paid. F. Adjustments for extraordinary items if any G. Net cash provided by (or used in) operating activities

B & C - Cash Flows from Investing and Financing Activities

When making the cash flow statement, it's important to separate major items of cash coming in and going out from investing and financing activities. These should be listed separately under "Cash Flow from Investing Activities" and "Cash Flow from Financing Activities," showing both the total cash received and paid out, as well as the net cash flow.

Format of Cash Flow Statement

Cash Flow Statement (Direct Method)

A. Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Income taxes paid Cash flow before extraordinary item Proceeds from earthquake disaster settlement Net Cash from Operating Activities B. Cash flows from investing activities Purchase of fixed assets Proceeds from sale of equipment Interest received Dividend received Net Cash from Investing Activities C. Cash flows from financing activities Proceeds from issuance of share capital Proceeds from long-term borrowings Repayments of long-term borrowings Interest paid Dividend paid Net Cash from Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents (A + B + C) Cash and Cash Equivalents at Beginning of Period Cash and Cash Equivalents at End of Period

Cash Flow Statement (Indirect Method)

A. Cash flows from operating activities Net profit before tax and extraordinary items Adjustments for: Depreciation Foreign exchange Investments Gain or loss on sale of fixed assets Interest/dividend Operating profit before working capital changes. Adjustments for: Trade & other receivables Inventories Trade payables Cash generation from operations Interest paid Direct taxes Cash before extraordinary items Deferred revenue Net Cash from Operating Activities. B. Cash flows from investing activities Purchase of fixed assets Sale of fixed assets Sale of investments Purchase of investments Interest received Dividend received Loans to subsidiaries Net Cash from Investing Activities C. Cash flows from financing activities Proceeds from issue of share capital Proceeds from long term borrowings Repayment to finance/lease liabilities Dividend paid Net Cash from Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents (A + B + C) Cash and Cash Equivalents at the Beginning of the Period Cash and Cash Equivalents at the End of the Period

Limitations of Cash Flow Analysis

Cash flow analysis is a valuable tool in financial analysis, but it has its own limitations. These limitations include:

The cash flow statement and the income statement are not the same. The income statement includes both cash and non-cash items, so the net cash amount doesn't always match the net income of the business.
The cash balance shown in the cash flow statement might not truly reflect how much cash the business has on hand because it can be affected if the business delays purchases and other payments.
The cash flow statement, income statement, and funds flow statement each serve different purposes and are important in their own way. They can't be swapped for one another because they have different jobs to do.

Also Check:
What is Forecasting Financial Statements? Meaning and Example	Capital Budgeting, Meaning and Techniques
Law relating to Civil Procedure	What is Dividend Decisions? Definition, Types, and Policies
Law relating to Limitation	Law relating to Evidence

Cash Flow FAQs

Why is cash flow important for businesses?

Cash flow ensures businesses can cover operational costs, pay debts, invest in growth, and handle unexpected expenses. Without adequate cash flow, even profitable businesses can struggle financially.

How can a business improve its cash flow?

1- Reduce expenses. 2- Increase revenue. 3- Improve receivables. 4- Manage inventory. 5- Use financing options.

What are the different types of cash flow?

1- Operating Cash Flow: From core business operations. 2- Investing Cash Flow: From investments in assets. 3- Financing Cash Flow: From investors and creditors.

How is cash flow different from profit?

Profit is net income after expenses; cash flow is the actual movement of money. A business can be profitable but have poor cash flow, or vice versa.

🔥 Trending Blogs

Buy-Back of Shares: Meaning, Impacts, and Why Companies Do It

Corporate Entities for CS Executive December 2025 and June 2026

ICDR Regulations 2025, Key Provisions for CS and Commerce Students

Company Law Strategy for CS Executive Dec 2025

GST Composition Scheme, Rules, Turnover Limit, Rate, and Benefits

Talk to a counsellorHave doubts? Our support team will be happy to assist you!

7019243492

07019243492

Check out these Related Articles

Labour Reforms in India and the Role of Company Secretary (CS)

Read Full Story

27 Jul 2025, 02:31 pm

Role of CS in Unearthing Corporate Frauds, Scope in Governance and Compliance

Read Full Story

27 Jul 2025, 02:02 pm

Life Cycle of a Startup From Ideation to Exit Strategy

Read Full Story

25 Jul 2025, 08:32 pm

CS EXECUTIVE

How to do CMSL in 8 Days?

Read Full Story

21 Jul 2025, 10:49 pm

CS EXECUTIVE

CS Executive CMSL Crack Code December 2025

Read Full Story

21 Jul 2025, 10:40 pm

CS EXECUTIVE

CS Executive ECIPL Answer Writing Tips 2025

Read Full Story

21 Jul 2025, 10:35 pm

Social Stock Exchange (SSE), Meaning, Framework, and Role of Company Secretaries

Read Full Story

21 Jul 2025, 11:20 pm

Due Diligence, Meaning, Process, and Importance in Financial Analysis

Read Full Story

21 Jul 2025, 11:14 pm

Evolving ESG Reporting Landscape in India, Trends, Frameworks, and Compliance

Read Full Story

21 Jul 2025, 11:08 pm

Join 15 Million students on the app today!

Live & recorded classes available at ease

Dashboard for progress tracking

Millions of practice questions at your fingertips

Free Learning Resources

PW Books

Notes (Class 10-12)

Class 10 Math's Notes

Class 10 Chemistry Notes

Class 10 Physics Notes

lass 10 Biology Notes

Aptitude & Reasoning

Class 10 Geography

Physics Class 11 Notes

Class 11 Chemistry Notes

Maths Notes Class 11

Zoology Class 11

Class 11 Botany Notes

Physics Class 12 notes

Chemistry Class 12

Maths Notes Class 12

Zoology class 12

Class 12th Botany Notes

PW Study Materials

Arjuna JEE Study Material

JEE 5 PYQs

JEE Mind Maps

Yakeen Study Material

NCERT Punch

Arjuna Neet Study Material

NEET PYQs

CBSE Sample Paper

CBSE Question Bank

Udaan For Class 10th Study Material

Notes (Class 6-9)

Class-6 Theory & Notes

Math's Notes for class 7

Science Notes for class 7

Class 8 Math Notes

Class 8 Chemistry Notes

Class 8 Physics Notes

Class 8 Biology Notes

Class 8 SST Notes

Class 9 Math's Notes

Class 9 Physics Notes

Class 9 Chemistry Notes

Class 9 Biology Notes

Ncert Solutions

NCERT Solutions For Class 6

NCERT Solutions For class 7

NCERT Solutions for class 8

NCERT Solutions for class 9

NCERT Solutions for class 10

NCERT Solutions for class 11

NCERT Solutions for Class 12

NCERT Solutions For Class 6

Govt Exams

Entrance Exams

Our Other Websites

Class 6th to 12th Online Courses

Class 12 Online Course

Class 11 Online Course

Class 10 Online Course

Class 9 Online Course

Class 8 Online Course

Govt Job Exams Courses

SSC Online Coaching

Bank Exam Online Coaching

TET Online Coaching

JAIIB & CAIIB Online Coaching

Bihar Exam Online Coaching

UPSC Coaching

UPSC Online Coaching

UPSC Offline & Hybrid Coaching

State PSC Online Coaching

UPPSC Online Coaching

BPSC Online Coaching

Defence Exam Coaching

NDA Online Coaching

CDS Online Coaching

AFCAT Online Coaching

Agniveer Online Coaching

Gate Exam Coaching

Civil Engineering Courses

Mechanical Engineering Courses

Formulas

Other Exams

Company Secretary Exam

Know about Physics Wallah

Physics Wallah is an Indian edtech platform that provides accessible & comprehensive learning experiences to students from Class 6th to postgraduate level. We also provide extensive NCERT solutions, sample paper, NEET, JEE Mains, BITSAT previous year papers & more such resources to students. Physics Wallah also caters to over 3.5 million registered students and over 78 lakh+ Youtube subscribers with 4.8 rating on its app.

We Stand Out because

We provide students with intensive courses with India’s qualified & experienced faculties & mentors. PW strives to make the learning experience comprehensive and accessible for students of all sections of society. We believe in empowering every single student who couldn't dream of a good career in engineering and medical field earlier.

Our Key Focus Areas

Physics Wallah's main focus is to make the learning experience as economical as possible for all students. With our affordable courses like Lakshya, Udaan and Arjuna and many others, we have been able to provide a platform for lakhs of aspirants. From providing Chemistry, Maths, Physics formula to giving e-books of eminent authors like RD Sharma, RS Aggarwal and Lakhmir Singh, PW focuses on every single student's need for preparation.

What Makes Us Different

Physics Wallah strives to develop a comprehensive pedagogical structure for students, where they get a state-of-the-art learning experience with study material and resources. Apart from catering students preparing for JEE Mains and NEET, PW also provides study material for each state board like Uttar Pradesh, Bihar, and others

What is Cash Flow?

Utility of Cash Flow Analysis

Helps in efficient cash management
Helps in internal financial management
Discloses the movements of cash
Discloses success or failure of cash planning
Evaluate management decisions
Illustrate the connection between net income and changes in the business's cash flow.
Efficiency in cash management

Definition of Specific Terms Used in the Context of a Cash Flow Statement.

Also Read: Time Value of Money, Present and Future Value

Classification of Cash Flow Statement

Cash Flows from Operating Activities	Examples Of Cash Flows from Operating Activities
Operating activities are the principal revenue producing activities of the enterprise and other activities that are not investing and financing activities Operating activities include cash effects of those transactions and events that impact the calculation of net profit or loss.	a) Cash received from selling goods and providing services; b) Cash receipts from royalties, fees, commissions. and other revenues: c) Cash payments made to suppliers for goods and services; d) Cash payments made to employees and on their behalf;

Cash Flows from Investing Activities		Examples Of Cash Flows from Investing Activities
Investing activities encompass the acquisition and sale of long-term assets and other investments that are not considered cash equivalents. In simpler terms, these activities involve transactions and events related to purchasing and selling long-term productive assets (such as land, buildings, and machinery) that are not intended for immediate resale, as well as other types of investments.		Cash payments for acquiring fixed assets (including intangible assets), which cover expenses like capitalized research and development costs and self-constructed fixed assets; cash receipts from selling fixed assets (including intangible assets); cash payments for purchasing shares, warrants, or debt instruments of other companies and interests in joint ventures (excluding instruments considered cash equivalents or held for trading); cash receipts from selling shares, warrants, or debt instruments of other companies and interests in joint ventures (excluding instruments considered cash equivalents or held for trading); cash advances and loans extended to third parties (excluding those made by financial institutions); cash receipts from the repayment of advances and loans made to third parties (excluding those received by financial institutions); cash flows related to futures contracts, forward contracts, option contracts, and swap contracts, unless these contracts are held for trading purposes or classified as financing activities

Cash Flows from Financing Activities		Examples Of Cash Flows from Financing Activities
Financing activities involve transactions that affect the size and structure of the owners' capital (including preference share capital for companies) and the borrowings of the enterprise.		a) Cash received from issuing shares or similar financial instruments; b) cash proceeds from issuing debentures, Loans notes. bonds and other short-term borrowing: c) cash repayments of amounts borrowed i.e redemption of debentures. bonds etc.: d) cash payments to redeem preference shares; e) payment of dividend.

Treatment of Interest and Dividend

	Non -Financial Enterprises
Interest paid	Interest received	Dividend Paid	Dividend received
Financing Activities	Investing Activities	Financing Activities	Investing Activities
	Financial Enterprises
Interest paid	Interest received	Dividend Paid	Dividend received
Operating Activities	Operating Activities	Financing Activities	Operating Activities

Preparation of a Cash Flow Statement:

Cash Flow Statement	(Rs)
A. Cash flows from operating activities
B. Cash flows from investing activities
C. Cash flows from financing activities
Net increase (decrease) in cash and cash equivalents (A + B + C)
+ Cash and cash equivalents at the beginning
= Cash and cash equivalents at the end

Cash Flows from Operating Activities

Direct Method: Here are some typical examples of cash receipts and cash payments generated by operating activities:

Cash sales of goods and services;
Cash collected from debtors (customers);
Cash receipts of interest or dividends;
Cash receipts of royalties, fees, commission and other revenues;
Cash payments to suppliers (creditors);
Cash payments for various operating expenses i.e. rent, rates, power etc..
Cash payments for wages and salaries to employees;
Cash payments for income tax etc.

Some of the items to be shown in the cash flow statement are illustrated below:

Collections from Customers:

Cash Collected from Debtors = Credit Sales + Decrease in Accounts Receivable or - Increase in Accounts Receivable.

Payment to Suppliers:

Payment to Employees:

Rent Received:

Rent Received = Rent Revenue + Opening Balance of Rent Receivable - Closing Balance of Rent Receivable. OR Rent Received = Rent Revenue + Decrease in Rent Receivable or - Increase in Rent Receivable.

Interest Paid:

Insurance:

Indirect Method

A summary of adjustments required to convert the net profit to net cash flow from operating activities through indirect method is as follows:

	Particulars	Amount (RS.)
	A. Net profit before tax and extraordinary item B. Adjustments for non-cash and non-operating items: Add: Amount written off in respect of depreciation, goodwill, preliminary expenses, underwriting commission etc. Add/Less: Other non-operating items C. Adjustments for gains and losses from the sale of fixed assets and investments: Add. Loss on sale of fixed assets/investments Less: Profit on sale of fixed assets/ Investments D. Adjustments for changes in current assets (excluding cash and cash equivalents) and current liabilities (excluding bank overdrafts) Add: Decrease in accounts of current assets e.g. debtors, bill receivable, stock, prepaid expenses etc. Less: Increase in accounts of current assets. Add: Increase in accounts of current liabilities; e.g., creditors, bills pa gable, outstanding expenses, etc. Less: Decrease in accounts of current liabilities. E. Cash generated from operations Less: Income tax paid. F. Adjustments for extraordinary items if any G. Net cash provided by (or used in) operating activities

B & C - Cash Flows from Investing and Financing Activities

Format of Cash Flow Statement

Cash Flow Statement (Direct Method)

Cash Flow Statement (Indirect Method)

Limitations of Cash Flow Analysis

Cash flow analysis is a valuable tool in financial analysis, but it has its own limitations. These limitations include:

The cash flow statement and the income statement are not the same. The income statement includes both cash and non-cash items, so the net cash amount doesn't always match the net income of the business.
The cash balance shown in the cash flow statement might not truly reflect how much cash the business has on hand because it can be affected if the business delays purchases and other payments.
The cash flow statement, income statement, and funds flow statement each serve different purposes and are important in their own way. They can't be swapped for one another because they have different jobs to do.

Also Check:
What is Forecasting Financial Statements? Meaning and Example	Capital Budgeting, Meaning and Techniques
Law relating to Civil Procedure	What is Dividend Decisions? Definition, Types, and Policies
Law relating to Limitation	Law relating to Evidence