Cash flow statement

Ind AS 7

Prof. Sobhesh Kumar Agarwalla

Indian Institute of Management, Ahmedabad

Prof. Sobhesh Kumar Agarwalla (IIMA) Cash flow statement Ind AS 7 1/7
Cash flow statement - Purpose (as per Ind AS 7)
Provide information to enable users to evaluate:
I ability to generate cash and cash equivalents, the timings and certainty of their
generations
I changes in the net assets of an entity
I changes in its financial structure (including its liquidity and solvency)
I ability to affect the amounts and timings of cash flows
I relationship between profitability and net cash flows

Enhances comparability of the reporting of operating performance by different entities

because it eliminates the effects of using different accounting treatments

Prof. Sobhesh Kumar Agarwalla (IIMA) Cash flow statement Ind AS 7 2/7
Definitions (Ind AS 7)
Cash flows are inflows and outflows of cash and cash equivalents
Cash: cash on hand and demand deposits
Cash equivalents: short-term (maturity <= 3months), highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value
Operating activities: are principal revenue-producing activities of the entity and other
activities that are not investing or financing activities
Investing activities: are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents
Financing activities: are activities that result in changes in the size and composition of
the contributed equity and borrowings of the entity

Prof. Sobhesh Kumar Agarwalla (IIMA) Cash flow statement Ind AS 7 3/7
Step I - Classify cash A/c items into Operating, financing and investing

Particulars Amount Head

Accounts Receivable 72000 Operating
Commission Income 400 Operating
Dividend received 20 Investing
Sale of Investment 180 Investing
Sale of Car 500 Investing
Bad debt recovered 50 Operating
Issue of shares 200 Financing
Adv. Tax refund 200 Operating

Accounts Payable -22500 Operating

Cash Purchase -16000 Operating
Salary -1800 Operating
Commission to Directors -600 Operating
Advance Tax -2600 Operating
Insurance -1800 Operating
Power and fuel -1600 Operating
Wages -4200 Operating
Rent (HO) -4300 Operating
Dividend -325 Financing
Purchase of Investments -150 Investing
Excise Duty -1600 Operating
Capital WIP -220 Investing
Selling & Advt. -1800 Operating
Bank charges -50 Operating
Interest (BL) -360 Financing
Interest(deb) -500 Financing
Issue expenses -10 Financing

Net Change 13135

Op. balance 460
Cl. Balance 13595
Prof. Sobhesh Kumar Agarwalla (IIMA) Cash flow statement Ind AS 7 4/7
Step 2 - Sort the items and freeze investing and financing section. You get CFS (direct method)

Particulars Amount Head

Commission to Directors -600 Operating
Insurance -1800 Operating
Wages -4200 Operating
Rent (HO) -4300 Operating
Excise Duty -1600 Operating
Accounts Payable -22500 Operating
Cash Purchase -16000 Operating
Accounts Receivable 72000 Operating
Bad debt recovered 50 Operating
Commission Income 450 Operating (++TDS)
Power and fuel -1600 Operating
Salary -1800 Operating
Selling & Advt. -1800 Operating
Bank charges -50 Operating
CFO before income tax 16250
Adv. Tax refund 200 Operating
Advance Tax -2650 Operating (–TDS)
Cash flow from operations 13800

Dividend received 20 Investing

Sale of Investment 180 Investing
Sale of Car 500 Investing
Purchase of Investments -150 Investing
Capital WIP -220 Investing
Cash flow from investing 330

Issue of shares 200 Financing

Dividend -325 Financing
Interest (BL) -360 Financing
Interest(deb) -500 Financing
Issue expenses -10 Financing
Cash flow from financing -995
Prof. Sobhesh Kumar Agarwalla (IIMA) Cash flow statement Ind AS 7 5/7
CFS using indirect method
Indirect method is used only for Cash flow from operations. Cash flow from investing and
cash flow from financing is always prepared using direct method.
Ind AS 7 mandates showing income tax paid separately. Therefore, it is to be shown in
the same way as shown under direct method. (Note: US GAAP does not require this)
Under indirect method, the objective is to reconcile the PBT number in the income
statement with the CFO before income tax.
I Add back all non-cash expenses these items have lowered your profit but does not
result in any cash payments).
F Examples: Depreciation, amortization, provisions for doubtful debts, etc.
I Adjust/Reverse all items which belongs to other heads, lest they will be
double-counted (e.g. interest expenses (if paid) would have already appeared in
the financing head. It has also lowered my PBT.)
F Other Examples: reduce interest income, reduce gain (add losses) on sale of
assets/investmens
I Adjust for changes in operating working capital by comparing the opening and
closing balance sheet
F Add: increase in current liabilities and decrease in current assets
F Subtract: increase in current assets and decrease in current liabilities
I What we are basically doing is comparing each items belonging to CFO (before
tax) and the corresponding figure (if any) in the I/S.

Prof. Sobhesh Kumar Agarwalla (IIMA) Cash flow statement Ind AS 7 6/7
 Thanks!

Comments/suggestions

Prof. Sobhesh Kumar Agarwalla (IIMA) Cash flow statement Ind AS 7 7/7