AS 3 - CASH FLOW STATEMENT
Cash equivalents
insignificant risk of changes in value; i.e.
date of acquisition
E.g.
Concept capsule 1
Whether ‘Investment in equity shares (listed)’ is treated as cash equivalents?
Suggested answer
As per AS 3, cash equivalents are short-term, highly liquid investments that are readily convertible into cash and which are subject to an insignificant risk of changes in value.
In the given case, Equity shares are highly liquid investments as they are listed in a stock exchange but the equity shares have significant risk of change in value i.e. value of shares fluctuates highly, hence equity shares cannot be treated as cash equivalents.
Concept capsule 2
X Ltd. purchased debentures of ` 10 lacs of Y Ltd., which are redeemable within three months. How will you show this item as per AS 3 while preparing cash flow statement for the year ended on 31st March, 2018?
Suggested answer
As per AS 3, cash and cash equivalents consists of cash in hand, balance with banks and short-term, highly liquid investments. Short-term investment is an investment which has a maturity of three months or less from the date of acquisition
In the given case, the investment is getting redeemed within 3 months from the date of acquisition and generally there will not be any significant change in value. So, it should be classified as an item of ‘cash equivalents’.
Concept capsule 3
From the following information of XYZ Limited, calculate cash and cash equivalent as on 31-03-20X2 as per AS 3.
Term Investment in highly liquid Sovereign Debt Mutual fund on 01-03-20X2 (having maturity period of less than 3 months)
Rate: On the day of deposit ` 69/USD as on 31-03-20X2 ` 70/USD)
Suggested answer
Note: Short term investment in liquid equity shares and fixed deposit will not be considered as cash and cash equivalents.
Cash flow statement of X Ltd. for the year ended 31-3-20XX
Particulars
Add:
Operating activities
Investment activities
E.g
Financing activities
Concept capsule 4
Ravi Ltd. holds shares and debentures of other entities for trading purposes. How do you classify the transactions of purchase and sale of these securities in its CFS?
Suggested answer
Operating activities are principal revenue producing activities of the entity and other than investing and financing activities.
In the given case, the company is holding the shares and debentures for trading purpose as part of its business; hence it should be classified as operating activities.
Concept capsule 5
Concept capsule 4
Classify the following activities as per AS 3 Cash Flow Statement:
(i) Interest paid by financial enterprise
(ii) Tax deducted at source on interest received from subsidiary company
(iii) Deposit with Bank for a term of two years
(iv) Insurance claim received towards loss of machinery by fire
(v) Bad debts written off
Suggested answer
(i) Interest paid by financial enterprise Cash flows from operating activities
(ii) TDS on interest received from subsidiary company Cash flows from investing activities
(iii) Deposit with bank for a term of two years Cash flows from investing activities
(iv) Insurance claim received against loss of fixed asset by fire - Extraordinary item to be shown as a separate heading under ‘Cash flow from investing activities’
(v) Bad debts written off - It is a non-cash item which is adjusted from net profit/loss under indirect method, to arrive at net cash flow from operating activity.
Concept capsule 6
During the year Harsha Ltd. acquired 60% equity shares in Y Ltd. for ` 50 crore and it sold 53% shares in Z Ltd. for ` 40 crore. The accountant of the company wants to net off the transactions and disclose ` 10 crore (` 50 – 40) under investment activities. Comment
Suggested answer
As per AS 3, acquisitions and disposal of subsidiaries or other business units should NOT be netted off and it requires separate presentation in CFS under investing activities. Hence it should present the transactions in the following manner:
Concept capsule 7
Manasa Ltd. acquired a car for `10 lakh on credit of 3 months. Delay in payment is charged with 12% interest. The company paid a total amount of `10.5 lakh. How should the company present the same in CFS?
Suggested answer
As per AS 3, if a single transaction includes multiple activities – the entity should bifurcate and classify under the respective heads separately based on its nature.
In the given case, payment includes two activities i.e. 1. Payment for the asset (` 10 lakh); and 2. Payment of Interest (` 0.5 lakh). Payment for the asset is an investment activity and payment of interest is a financing activity. Hence the company should present under the respective activities of CFS.
Concept capsule 8
In the following cases, state with reasons whether the classification adopted by the respective enterprises is in accordance with AS 3:
(a) Raj Ltd. has purchased fixed assets from Egypt for $10,000 on 1-1-2013. It has entered into currency option contract for purchase of foreign exchange to pay for fixed asset and paid a premium at `17,000. The premium has been classified as a financing activity.
(b) Withdrawal of demand deposits has been classified by Punjab National Bank as an operating activities
Suggested answer
(a) The premium paid for foreign exchange contract is directly related to acquisition of fixed assets. Hence, it should be classified as investing activity;
(b) It a banking company, So withdrawal and making demand deposits by the customers is an operating activity;
Concept capsule 9
Rama Ltd. has paid income-tax amounting to ` 2 crore during the current year. It has also paid corporate dividend tax of ` 50 lakh in the same year. The total tax payment of ` 2.5 crore has been classified under operating activities. Comment
Suggested answer
Payment of income tax is an operating activity; and Corporate dividend tax is directly related to dividend which is financing activity so corporate dividend tax also should be classified as financing activity. The company’s view on this is not correct.
See the below format of cash flows from operating activities under indirect method
Suggested
There is NO guidance on bank overdraft in AS 3. In the absence of information, one can consider Ind AS 7 (Indian Accounting Standards (IFRS)) as it is followed by some set of companies in the country.
As per Ind AS 7 Para 8–“Bank borrowings are generally considered to be financing activities. However, where bank overdrafts which are repayable on demand form an integral part of an entity’s cash management, bank overdrafts are included as a component of cash and cash equivalents.”
So, it is advisable to treat Bank overdraft as part of Cash and cash equivalents only when it is repayable on demand.
Reporting Cash Flows from Investing and Financing Activities report separately receipts payments
a
like rent collected on behalf and paid to the owner of the properties; This is not the cash flow of the entity so present on net basis and Acceptance and repayment of demand deposits by bank; (bank point of view);
b
like advances made or received for purchase or sale of investment.
Concept capsule 11
Garden Ltd. acquired fixed assets viz. Plant and machinery for ` 20 lakhs. During the same year it sold its furniture and fixtures for ` 5 lakh. Can the company disclose, net cash outflow towards purchase of fixed assets in the cash flow statement as per AS3? (PCC – May 2007)
Suggested answer
As per AS 3, an entity should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities.
In the given case, acquisition of fixed assets and sale of furniture and fixtures are two major class of investing activities; hence, the company cannot disclose net cash flows;
(2) Cash flows in foreign currency
Concept capsule 12
date of cash flow
X Ltd. borrowed $ 1,000 from Y corporation, USA. The date of the loan agreement is 1-1-2018 and the entity received the money on 15-1-2018 due to RBI approvals, etc. Exchange rates per $ on 1-1-2018 & 15-1-2018 are ` 45 & ` 48 respectively. At what rate should it be converted for presentation in CFS?
Suggested answer
As per AS 3, foreign currency cash flows are converted into reporting currency using the exchange rate on the date of receipt/payment. In the given situation, the date of cash flow is 15-1-2018; hence the relevant rate is ` 48.
The borrowing of ` 48,000 ($1,000 × 48) should be shown under financing activities.
UNREALISED non-cash items excluded
Extraordinary/exceptional items: disclosed separately
(3) Loans/Advances given and Interests earned
a
b
c to subsidiaries investing cash -
d to employees operating cash flows -
e Advance payments to suppliers operating cash flows
f Interests earned from customers for late payments operating cash flows
(4) Loans/Advances taken and Interests paid
a Financial enterprises the ordinary course
b -financial enterprises
Operating cash flows
c subsidiaries financing cash flows
d customers operating -
e to suppliers for late payments are operating cash
f
(5) Investments made and dividends earned
a Financial enterprises the ordinary course
b -financial enterprises Investing
c
Operating cash flows
(6) Non-cash items excluded elsewhere
Examples of non-cash items
3.10
(7) Insurance claims received
a againstlossofstockorloss extraordinaryoperatingcashinflows
b againstlossoffixedassetsareextraordinaryinvesting -
Additional information of CY (2018):
Working Notes:
Note: ` ` cash flows from investing activities and ` operating activities
WN # 4: Long-term borrowings made and repaid during the year Long-term borrowings a/c
3.14
WN # 5: Interest paid during the year
Question No. 1
Additional Information:
3.16
Notes:
As per AS 3 cash and cash equivalents consists of cash in hand, balance with banks and short-term, highly liquid investments. As the investment, of ` 3 lacs, is made in debentures for short-term period, it is an item of ‘cash equivalents’. Hence not considered as part of investing activity.
Question No. 4
had a bank balance
Question No. 5
Particulars
i.e.
i.e. Any transaction, which does not result in cash flow, should not be replaced in the cash flow statement Movements within cash or cash equivalents are not cash flows
` not a cash flow
Amount (`)
Answer
Cash Flow Statement from Investing Activities of Subham Creative Limited for the year ended 31-3-2019
ACCOUNTING STANDARDS MADE EASY (ACCOUNTS/ADV. ACCOUNTS) STUDY MATERIAL
AUTHOR : RAVI KANTH MIRIYALA, SUNITANJANI MIRIYALA
PUBLISHER : TAXMANN
DATE OF PUBLICATION : JUNE 2023
EDITION : 18th Edition
ISBN NO : 9789357781176
NO. OF PAGES : 432
BINDING TYPE : PAPERBACK
DESCRIPTION
This book is prepared exclusively for the Intermediate Level of Chartered Accountancy Examination requirement. It covers the revised syllabus per ICAI under the New Scheme of Education and Training. It applies to Group 1/Paper 1 – Accounting & Group 2/Paper 5 – Advanced Accounting.
This book will be helpful for students of CA-Inter/IPCC, CMA-Intermediate, and other specialised courses. The Present Publication is the 18th Edition for CA-Inter | Nov. 2023 exam. This book is authored by CA Ravi Kanth Miriyala & CA Sunitanjani Miriyala, with the following noteworthy features:
• [Self-preparatory Book] The book has been written in a classroom-style-teaching methodology so that the average student can understand & master the subject without assistance
• [Most Amended & Updated] This book is updated with the recent revisions made by the Ministry of Corporate Affairs
• [Simple & Lucid Language] along with a step-by-step approach for a better understanding
• [Conceptual Understanding with 500+ Detailed Examples] for the Standards
• [Diagrammatic Presentation] is given wherever required
• [Past Exam Question] including the May 2023 Exam & RTPs & MTPs of ICAI
• [Weightage of Accounting Standards] in previous CA Intermediate Exams
• [Student-Oriented Book] The authors have developed this book keeping in mind the following factors:
o Interaction of the authors with their students, with specific emphasis on difficulties faced by students in the examinations
o Shaped by the authors' 10+ years' experience of teaching the subject matter at different levels
o Reactions and responses of students have also been incorporated at different places in the book
The detailed contents of this book are as follows:
• Chapter A – Introduction
• Chapter B – Preface to Accounting Standards (Very Important)
• Chapter C – Framework for Preparation and Presentation of Financial Statements
• AS 1 – Disclosure of Accounting Policies
• AS 2 – Valuation of Inventories
• AS 3 – Cash Flow Statement
• AS 4 – Contingencies and Events Occurring after the Balance Sheet Date
• AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
• AS 7 – Construction Contracts
• AS 9 – Revenue Recognition
• AS 10 - Property, Plant and Equipment (PPE)
• AS 11 – The Effects of Changes in Foreign Exchange Rates
• AS 12 – Accounting for Government Grants
• AS 13 – Accounting for Investments
• AS 14 – Accounting for Amalgamation
• AS 16 – Borrowing Costs
• AS 17 – Segment Reporting
• AS 18 – Related Party Disclosures
• AS 19 – Leases
• AS 20 – Earnings Per Share
• AS 22 – Accounting for Taxes on Income
• AS 24 – Discontinuing Operations
• AS 26 – Intangible Assets
• AS 29 – Provisions, Contingent Liabilities and Contingent Assets
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