IAS-3

CASH FLOW STATEMENT

 CASH FLOW STATEMENT
• It is also known as Statement of Cash Flows
which shows the changes in the cash position
of an organisation between two periods.
• Along with showing the changes in cash
position of an organisation, it also depicts the
reasons for such change during the period.
 Objective of Accounting Standard 3 - Cash
Flow Statements - AS 3
• It provides the users of financial statement with a basis to
assess the ability of the organisation to generate cash &
cash equivalents & the needs of the organisation to utilise
the cash flows.
• The economic decisions taken by an organisation & the
users are based on the evaluation of the ability of an
enterprise to generate cash & cash equivalents and the
timing & certainty of their generation.
• It also provides information about the historical changes
in cash & cash equivalents of an organization which
classifies cash flows during the period from operating
activities, investing activities and financing activities.
 Applicability of AS 3 Cash Flow Statements
The applicability of Cash flow statement has been defined
under the Companies Act, 2013. As per the definition in the
act, a financial statement includes the following:
i. Balance sheet
ii. Statement of Profit and loss / Income and expenditure account
iii. Cash flow statement
iv. Statement of changes in equity
v. Explanatory notes
Thus, cash flow statements are to be prepared by all
companies.
Cash flow statement of listed companies shall be presented
only under the indirect method as prescribed in AS 3
Exceptions
The act also specifies a certain category of companies
which are exempted from preparing the CFS . Such
companies are One Person Company (OPC), Small
Company and Dormant Company.
♦ OPC means a company which has only one single person
as its member.
♦ A Small Company is a private company with a maximum
paid up capital of Rs. 50 lakhs and a maximum turnover
of Rs. 2 crores.
♦ A Dormant Company is an inactive company which is
formed for some future projects or only to hold an asset
and has no significant transactions.
Definitions of some terminologies used in AS-3
• Cash comprises cash on hand and demand deposits with banks.

• Cash equivalents 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.

• Cash flows are inflows and outflows of cash and cash equivalents.

• Operating activities are the principal revenue-producing activities

of the enterprise 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 owners’ capital (including preference share
capital in the case of a company) and borrowings of the enterprise.
Cash and Cash Equivalents
Cash Equivalents
• Held for meeting short term commitments
• It is readily convertible into known amounts of
cash
• It has a very in significant risk
• Short maturity (say 3 months maximum)
Cash flows exclude
• Movements between cash and cash equivalents
...Cont
• Cash equivalents are held by an enterprise for meeting its short-
term cash commitments instead of the purpose of investment or
such other purposes. For investments to qualify as cash equivalents:
1. An investment must be easily convertible into cash and
2. Must be subject to a very low level of risk with respect to changes in
its value
• Hence, an investment would qualify to be a cash equivalent only
when such an investment has a short maturity of three months or
less from its acquisition date.
• AS 3 Cash Flow Statements states that cash flows should exclude
the movements between items which forms part of cash or cash
equivalents as these are part of an enterprise’s cash management
rather than its operating, financing and investing activities.
• Cash management consists of the investment of excess cash in the
cash equivalents.
Features of Cash Flow Statement
The cash flow statement should report cash
flows during the period classified by
a. Operating,
b. Investing and
c. Financing activities.
Sum of these three types of cash flow reflect
net increase or decrease of cash and cash
equivalents.
Presentation of Cash Flow Statement
A cash flow statement must depict the cash
flows within the period classifying them as :
Investing
Activities

Cash
Flow
Statement
Financing
Activities Operating
Activities
Cash Flow from Operating Activities
These are principal revenue producing activities
of the enterprise.
The amount of cash flows arising from operating
activities is a key indicator of the extent to which
the operations of the enterprise have generated
sufficient cash flows to maintain the operating
capability of the enterprise, pay dividends, repay
loans and make new investments without
recourse to external sources of financing.
Information about the specific components of
historical operating cash flows is useful, in
conjunction with other information, in
forecasting future operating cash flows.
Examples of cash flows from operating activities are:
(a) cash receipts from the sale of goods and the rendering of
services;
(b) cash receipts from royalties, fees, commissions and other
revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance enterprise
for premiums and claims, annuities and other policy benefits;
(f) cash payments or refunds of income taxes unless they can
be specifically identified with financing and investing
activities; and
(g) cash receipts and payments relating to contracts when the
contracts are held for dealing or trading purposes.
 There are 2 methods of preparing the
cash flows from Operating Activities
Direct Method :
• While preparing CFS as per DM, Actual Cash Receipts
from Operating Revenues & Actual Cash Payments for
Operating Activities are only considered.
• Items like Depreciation, Amortisation, Preliminary
expenses, Debenture Discount, etc are ignored.
• Only cash transactions are considered, non cash
transactions are not considered
• No adjustment is made for Loss/gain on sale of fixed
assets and Investments.
Format for computation of cash flows fro
operating Activities as per Direct Method

Particulars Amount
Cash Receipts from customers xx
Cash paid to suppliers and employees (xxx)
Cash generated from Operations xxxx
Income Tax Paid (xx)
Cash Flow before Extra-ordinary items xxxx
Extra-ordinary items xxx
Net cash from Operating Activities (Direct Method) xxxxx
Indirect Method
While preparing CFS as per Indirect Method,
Non cash and Non operating charges are
added back to the net profits while Non cash
and Non operating credits are deducted to
calculate the Operating Profit before Working
Capital changes. Further, necessary
adjustments are made for increase/decrease
in Current Assets and Current Liabilities to
obtain Net Cash Flows from Operating
Activities as per the Indirect Method
Cash Flow from Investing Activities
• Cash flows from investing activities represent
outflows are made for resources intended for
generating cash flows and future income.
For instance:
(i) Cash paid for acquiring fixed assets
(ii) Cash received from disposal of fixed assets
(including intangibles)
(iii) Cash paid for acquiring shares, warrants or
debt instruments of other companies and
interests in Joint Ventures
Cash Flow from Financing Activities
Financing activities are those which brings
changes in composition and size of owner’s
capital and borrowings of an enterprise.
For instance:
(i) Cash received from issuing shares or other
similar securities
(ii) Cash received from issuing loans, debentures,
bonds, notes, and other short-term or long-term
borrowings
(iii) Cash repaid on borrowings
Important points
• Interest
Interest Received
 Received from investment – it is in investment activities
 Received from short term investment classified, as cash
equivalents should be considered as cash inflows from
operating activities.
 Received on trade advances and operating receivables
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
 +Cash flow from interest should be separately disclosed.
...cont
Dividend
• Dividend Received
 For financial enterprises – in operating activities
 For other than financial enterprises – in investing activities
• Dividend Paid
 Always classified as financing activities
• Cash flow from dividend should be separately disclosed
• Foreign currency transaction-Unrealized gain and losses arising from
changes in foreign exchanges rates are not cash flows.
...cont
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.
Non-Cash Transactions
• These should be excluded
from the cash flow
statement
• These transactions should be
disclosed in the financial
statements.
Eg.
Conversion of debt to equity