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AS – 3
CASH FLOW
STATEMENT
Definitions:
Cash comprises
cash on hand and cash at bank. (Demand Deposits with bank)
Cash
Equivalents are
v
Short Term
v
Highly Liquid Investments (Maturity around 3
months)
v
Subject to insignificant risk of changes in
value.
Cash Flows are
inflows and outflows of cash and cash equivalents.
Cash Flow
Statement represents the cash flows during the specified period by
operating, investing and financing activities.
Operating
Activities are the principal revenue-producing activities of the
enterprise and other activities that are not investing activities and financing
activities.
Example:
1] Cash receipts from
sales of goods/services
2] Cash receipts from
royalties, fees and other revenue items
3] Cash payments for
salaries, wages and rent
4] Cash payment to suppliers
for goods
5] Cash payments or
refunds of Income Tax unless they can be specifically identified with
financing or investing
activities
6] Cash receipts and
payments to future contracts, forward contracts when the contracts are held for
trading purposes.
Cash from operating
activities can be disclosed either by DIRECT METHOD OR BY INDIRECT METHOD.
Investing
Activities are the acquisition and disposal of long-term assets and
other investments not included in cash equivalents.
Example:
1] Cash
payments/receipts to acquire/sale of fixed assets including intangible assets
2] Cash payments to
acquire shares or interest in joint ventures (other than the cases where
instruments are considered as cash equivalents)
3] Cash advances and
loans made to third parties (Loan sanctioned by a financial enterprise is
operating activity)
4] Dividends and
Interest received
5] Cash flows from
acquisitions and disposal of subsidiaries
Financing
Activities are activities that result in changes in the size and composition
of the owners’ capital (including preference share capital in the case of a
company) and borrowing of the enterprise.
Example:
1] Cash proceeds from
issue of shares and debentures
2] Buy back of shares
3] Redemption of
Preference shares or debentures
4] Cash repayments of
amount borrowed.
5] Dividend and
Interest paid
An enterprise should
report separately major classes of gross cash receipts and gross cash payments
arising from investing and financing activities.
However, cash flows
from following activities may be reported on a net basis.
v
Cash receipts and payments on behalf of
customers
For example: Cash collected on behalf of, and paid
over to, the owners of properties.
v
Cash flows from items in which turnover is
quick, the amounts are large and the maturities are short.
For example: Purchase and sale of investments
v
For financial enterprise: Cash receipts
and payments for the acceptance and repayment of deposits with a fixed maturity
date.
v
For financial enterprise: Deposits
placed/withdrawn from other financial enterprises
v
For financial enterprise: Cash advances
and loans made to customers and the repayment of those advances and loans.
Foreign Currency
Cash Flows:
Cash
flows arising in foreign currency should be recorded in enterprise’ reporting
currency applying the exchange conversion rate existing on the date of cash
flow.
The
effect of changes in exchange rates of cash and cash equivalents held in
foreign currency should be reported as separate part of the reconciliation of
the changes in cash and cash equivalents during the period.
Extraordinary
Items: These items should be separately shown under respective heads of
cash from operating, investing and financing activities.
Investing
and financing transactions that do not require the use of cash and cash
equivalents should be excluded from a cash flow statement. For Example
A]
The conversion of debt to equity
B]
Acquisition of an enterprise by means of issue of shares
Other
Disclosure:
Components of cash
and cash equivalents.
Reconciliation of
closing cash and cash equivalents with items of balance sheet.
The amount of
significant cash and cash equivalent balances held by the enterprise, which are
not available for use by it.