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 enterprises to generate cash and to utilize the cash. This statement is one of tools for assessing the liquidity of solvency of the enterprise.

Applicability

This standard applies to the following enterprises:

• Which has turnover more than Rs. 50 crores in a financial year.
• Listed companies – shares of these companies listed in stock exchange, cash flow statement of listed companies shall be presented only under the indirect method as prescribed in AS-3.

Features

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 reflect 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 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.

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.

Investment Activities: The activities of acquisition and disposal of long term assets and other investments not included in cash equivalents are investing activities. It includes 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 acquired 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 interest 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).

Financing Activities: Those activities that 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

It can be derived either from direct method or indirect method.

• Direct Method: In this method, gross receipts and gross payments of cash are disclosed.
• Indirect Method: In this method, profit and loss account is adjusted for the effects of transactions of non-cash nature.

Interest

Interest Received

• Received from investment. It is an investment activities.
• Received from short-term investment classified, as cash equivalents should be considered as cash inflows from operating activities.
• Received on trade advance and operating receivable should be in operating activities.

Interest Paid

• On loans/debts are in financing activities.
• On working capital loan and any other loan taken to finance operating activities are in operating activities.

Dividend

Dividend Received:

• For Financial Enterprises – in operating activities
• For other than Financial Enterprises – in investing activities

Dividend Paid – Always classified as financing activities.

Note:   Cash flow from interest and dividend should be separately disclosed.

Cash flow from foreign currency transactions

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.

Extraordinary items

The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed.

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 investment in associates, subsidiaries and joint venture

Enterprises having investment 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

In the following cases cash should be reported on the net basis (activities-wise) 

• Cash receipts and payments 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 by 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 other than short term borrowing having maturity period of three months and less).

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.

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. Example 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.

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 cash and cash equivalent balance held by the enterprises that are not available for use by it with explanation of Management.

FORMAT OF CASH FLOW STATEMENT

CASH FROM OPERATIONS (DIRECT METHOD)

CASH FROM OPERATIONS (INDIRECT METHOD)