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CASH FLOW STATEMENT (AS-3)
Cash flow statement is additional information to user of financial statement. This statement exhibits the flow of incoming and outgoing cash. This statement assesses the ability of the enterprise to generate cash and to utilize the cash. This statement is one of tools for assessing the liquidity and solvency of the enterprise.
Applicability
5.1 This Standard applies to all companies except One Person Company (OPC) and small companies and Dormant Company/inactive company.
“One Person Company” means a company which has only one person as a member.
“Small Company” means a company, other than a public company:
(i)Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; and
(ii)Turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees.
Following are not the “Small Company”:
(a)A holding company or a subsidiary company;
(b)A company registered under section 8 for charitable purpose;
(c)A company or body corporate governed by any Special Act; or
(d)A public company.
Features
5.2 Cash flow statement explains cash movement under the following three different heads namely:
Cash flow from operating activities. Cash flow from investing activities. Cash flow from financing activities.
Sum of these three types of cash flow reflects net increase or decrease of cash and cash equivalents
Cash: It consists of cash in hand and demand deposits.
Cash equivalent: It consists of short-term highly liquid investment having original maturity less than three months, which can be readily converted, into cash without decline of its value. In other words, these investments can be converted into cash without any risk.
5.2-1 Operating activities - They are principal revenue producing activities of the enterprises other than investing and financing activities. Examples of cash flows from operating activities are as follows:
Cash receipts from the sale of goods and the rendering of services;
Cash receipts from royalties, fees, commissions and other revenue;
Cash payments to suppliers for goods and service;
Cash payments to and on behalf of employees.
5.2-2 Investment Activities - The activities of acquisition and disposal of long-term assets and other investments not included in cash equivalents are investing activities. They include making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc. Examples of cash flows arising from investing activities are:
Cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalization, research and development costs and self-constructed fixed asset;
Cash receipts from disposal of fixed assets (including intangibles);
Cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purpose);
Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes).
5.2-3 Financing Activities - Are those activities which result in change in size and composition of owners capital and borrowing of the organization. It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.
Sale of share
Buy back of shares
Redemption of preference shares
Issue/redemption of debentures
Long-term loan/payment thereof
Dividend/interest paid
Cash flow from operating activities
5.3 It can be derived either from direct method or indirect method.
Direct Method: In this method, gross receipts and gross payment of cash are disclosed.
Indirect Method: In this method, profit and loss account is adjusted for the effects of transaction of non-cash nature.
Interest
5.4-1 Interest Received from investment. It is in investment activities. from short-term investment classified, as cash equivalents should be considered as cash inflows from operating activities. on trade advances and operating receivables should be in operating activities.
5.4-2 Interest Paid
On loans/debts is financing activities. On working capital loan and any other loan taken to finance operating activities is in operating activities.
Dividend
5.5-1 Dividend Received
For Financial Enterprises - in operating activities For other than Financial Enterprises - in investing activities.
5.5-2 Dividend Paid - Always classified as financing activities.
Note: Cash flow from interest and dividend should be separately disclosed.
Cash flow from foreign currency transactions
5.6 The effect of change in exchange rate in cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of cash and cash equivalents.
Unrealized gain and losses arising from changes in foreign exchange rates are not cash flows.
Example : Z Ltd. has no foreign currency cash flow for the year 2009. It holds some deposit in a bank in the USA. The balances as on 31.12.2009 and 31.12.2010 were US$ 100,000 and US$ 102,000 respectively. The exchange rate on December 31, 2009 was US$1 = 45. The same on 31.12. 2010 was US$1 = 50. The increase in the balance was on account of interest credited on 31.12.2010. Thus, the deposit was reported at 45,00,000 in the balance sheet as on December 31, 2009. It was reported at 51,00,000 in the balance sheet as on 31.12.2010. 83 CASH FLOW FROM
The profit and loss account was credited by 1,00,000 (US$ 2000 × 50) towards interest income. It was credited by the exchange difference of US$ 100,000 × ( 5045) that is, 500,000. In preparing the cash flow statement, 500,000, the exchange difference, should be deducted from the ‘net profit before taxes, and extraordinary item’. However, in order to reconcile the opening balance of the cash and cash equivalents with its closing balance, the exchange difference 500,000, should be deducted from the cash balance in note to cash flow statement.
Extraordinary items
5.7 The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed.
5.8 Treatment of Tax
Cash flow for tax payments/refund should be classified as cash flow from operating activities.
If cash flow can be specifically identified as cash flow from investment/financing activities, appropriate classification should be made.
Cash flow relating to investments in associates, subsidiaries and joint venture
5.9 Enterprise having investments in associates, subsidiaries and joint venture should report in the cash flow statement only cash flow between itself and the investee.
Reporting cash flow on net basis
5.10 In the following cases cash flow should be reported on the net basis (activities-wise)
Cash receipts and payment on behalf of customers when the cash flows reflect the activities of the customer rather than those of the enterprise (e.g. acceptance and repayment of demand deposits by bank, funds held for customers by investment enterprise); and Cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short (e.g., principal amount relating to credit card customers, the purchase or sale of investment and other short-term borrowing having maturity period of three months and less).
5.11 Cash flow relating to acquisition or disposal of subsidiaries
Cash flow arising from acquisition and from disposal of subsidiaries or other business units should be presented separately and classified as investing activities.
Total purchase or total disposal should be disclosed separately. The position of the purchase or disposal consideration discharged by means of cash and cash equivalents should be disclosed.
5.12 Non-cash transactions
Investing and financing transactions that do not involve the use of cash and cash equivalents should be excluded from a cash flow statement.
Such transaction should be disclosed in the financial statements.
Examples of non-cash transactions are:
-Acquisition of assets by assuming directly related liabilities.
-Acquisition of an enterprise by means of issue of shares.
-Conversion of debt to equity.
5.13 Disclosure of cash and cash equivalents
An enterprise should disclose the components of cash and cash equivalents and should present a reconciliation of the amount in the cash flow statement with the equivalent items reported in the balance sheet.
An enterprise should disclose the amount of significant cash and cash equivalent balance held by the enterprises that are not available for use by it with explanation of Management.
ILLUSTRATIONS
Q1. The following additional information is also relevant for the preparation of the statement of cash flows (figures are in ’000).
An amount of 250 was raised from the issue of share capital and a further 250 was raised from long-term borrowings.
Interest expense was 400 of which 170 was paid during the period. 100 relating to interest expense of the prior period was also paid during the period.
Dividends paid were 1,200.
Tax deducted at source on dividends received (included in the tax expense of 300 for the year) amounted to 40.
During the period, the enterprise acquired fixed assets for 350. The payment was made in cash.
Balance Sheet as at 31-12-2010
Profit 3,230
Plant with original cost of 80 and accumulated depreciation of 60 was sold for 20.
Foreign exchange loss of 40 represents the reduction in the carrying amount of a short-term investment in foreign currency designated bonds arising out of a change in exchange rate between the date of acquisition of the investment and the balance sheet date.
Sundry debtors and sundry creditors include amounts relating to credit sales and credit purchases only.
( ’000) 2010
Increase in sundry debtors (500)
Decrease in inventories 1,050
Decrease in sundry creditors (1,740)
Cash generated from operations 2,550
Income-tax paid (860)
Cash flow before extraordinary item 1,690
Proceeds from earthquake disaster settlement
Net cash from operating activities 1,870
Cash flows from investing activities
Purchase of fixed assets (350) Proceeds from sale of equipment
Dividends paid (1,200)
Net cash used in financing activities (1,150) Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period (See Note 1)
Cash and cash equivalents at end of period (See Note 1) 910
Note 1: Notes to the Cash Flow Statement (Direct & Indirect method) - Cash and Cash Equivalents - Cash and cash equivalents consist of cash in hand and balances with banks and investments in money market instruments. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts.
Cash in hand and balances with banks 20025
Short-term investments 670135
Cash and cash equivalents 870160
Effect of exchange rate changes 40Cash and cash equivalents as restated 910160
Cash and cash equivalents at the end of the period include deposits with banks of 100 held by a foreign branch, which are not freely remissible to the company because of currency exchange restrictions. The company has undrawn borrowing facilities of 2000 of which 700 may be used only for future expansion.
2. Total tax paid during the year (including tax deducted at sources on dividend received) amounted to 900.
Alternative Presentation (Indirect Method)
As an alternative, in an indirect method cash flow statement, operating profit before working capital changes is sometimes presented as follows:
Working Notes
The working notes given below do not form part of the cash flow statement and, accordingly, need not be published. The purpose of these working notes is merely to assist in understanding the manner in which various figures in the cash flow statement have been derived.
(Figures are in ’000)
Sundry debtors at the end of the year
Income-tax paid (including tax deducted at source from dividends received) Income-tax expense for the year (including tax deducted at source from dividends received)
Income-tax liability at the beginning of the year
Less: Income-tax liability at the end of the year
Out of 900, tax deducted at source on dividends received (amounting to 40) is included in cash flows from investing activities and the balance of 860 is included in cash flows from operating activities.
Students' Guide to Accounting Standards
(Adv. Accounts) | Study Material
AUTHOR : NOZER SHROFF, D.S. RAWAT
PUBLISHER : TAXMANN
DATE OF PUBLICATION : FEBRUARY 2025
EDITION : 14TH EDITION
ISBN NO : 9789364555944
NO. OF PAGES : 648
BINDING TYPE : PAPERBACK
DESCRIPTION
This book is tailored for CA-Intermediate (Group I | Paper 1 – Advanced Accounting) under the new ICAI syllabus. It simplifies complex accounting concepts and bridges theory with practical insights, enabling students to build a solid foundation for exams and future professional practice. With in-depth explanations, illustrations, and ample practice questions, it ensures confident application of Accounting Standards.
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• [Structured Learning] Dedicated chapters per standard with conceptual clarity & Q&A
• [Authored by Experts] Decades-long teaching and industry expertise
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