AS-3

Meaning of Cash flow Statement Cash is the nerve centre around which business activities flow. The profit figure shown in the profit & loss statement is the book profit- it does not represent cash profit. The stakeholders of a business entity are now more interested in knowing about the cash profit earned by the firm and not book profit. “ Cash flow statement is nothing but inflow and outflow of cash.” In other words, cash flow statement is an account of inflows and outflows of cash and cash equivalents. A Cash Flow Statement may be defined as “ a financial statement that summarizes the cash receipts & payments and net change in cash resulting from operating, financing and investing activities of an enterprise during a given period.” The statement is prepare in such a way that the cash flows of the period are reconciled with the beginning and ending cash balance.

Cash & cash Equivalents  Cash comprises of cash in hand and demand deposits with banks.  Cash equivalents, as defined in AS-3 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. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity.  The criterion used to determine the short term life of an investment to qualify for cash equivalent is a maturity period of three months or less.

Preparation of Cash Flow statement Cash flow statement should report cash flows during the period classified into three broad activities Operating activities which are principal revenue –producing activities. Investing activities which involve acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities which are activities that result in changes in the size and composition of the owner’s capital, preference share capital and borrowings of the enterprise.

Cash Inflow….. Operating ActivitiesInvesting ActivitiesFinancing Activities Examples of cash inflows Proceeds from sale of goods and rendering services Receipts from royalties, fees, and commissions Cash receipts relating to futures, forwards, option and swap contracts where the contracts are held for trading purpose. Cash receipts of an insurance enterprise for premiums and claims Cash refunds of income tax unless they can be specifically identified with financing and investing activities. Examples of cash inflows Cash receipts from disposal of fixed assets and investments Interest and / or dividend receipts Cash receipts from repayment of advances and loans made to third parties Examples of cash inflows Cash proceeds from issue of shares, debentures etc. Long term borrowings from banks/ financial institutions.

Cash Outflow…. Operating ActivitiesInvesting ActivitiesFinancing Activities Examples of Cash Outflow Payments to suppliers for goods and services Cash payments to and on behalf of employees Cash payments for income tax Examples of Cash Outflow Cash payments to acquire fixed assets, shares and other securities Cash advances and loans given to third parties. Examples of cash outflow Repayment of loan Repurchase of shares Interest paid Dividend paid Dividend tax paid

Rules for Working Capital Increase in current assets and decrease in current liabilities – Cash Outflow (Deduct) Decrease in Current assets and Increase in Current Liabilities – Cash Inflow (Add)

Special Terms- treatment in cash flow statement Non- cash Transactions : investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from cash flow statement. E.g. Conversion of debentures / preference shares into equity shares, issue of bonus shares, acquisition of undertakings/ assets by means of issue of shares, depreciation etc. Extraordinary items : The cash flow associated with extraordinary items should be classified as arising from operating, investing or financing activities and it should be separately disclosed. E.g. proceeds from earthquake disaster settlement (operating activities).

Conti… Foreign currency transactions : Cash flow arising from transactions in a foreign currency should be recorded in an enterprise ‘s reporting currency by applying the exchange rate between the reporting currency and foreign currency to the foreign currency amount at the date of the cash flow or at the rate that approximates the actual rate. Unrealized gains and losses arising from changes in foreign exchange rate are not cash flows. But the effect of such change on cash and cash equivalents held or due in a foreign currency is reported in cash flow separately in order to reconcile cash and cash equivalents at the beginning and end of the year.