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STATEMENT OF CASH FLOWS

“ Statement of Cash Flows” are covered by AS-3 “Cash Flow Statement” issued by ICAI*.

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As per clause 32 of Listing agreement the company shall provide a cash flow statement along with Balance Sheet and Profit and Loss a/c. The cash flow will be prepared in accordance with the Accounting Standard on Cash Flows (AS-3) issued by the Institute of Chartered Accountants of India, and the Cash Flows shall be presented only under indirect method as given in AS-3.

It is mandatory on all Level-I companies on or after 01.04.2001.

ApplicabilityApplicability

All enterprises that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows.

In India, the corresponding revised AS-3 will be in force from 1.4.2011.

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Cash and cash equivalents: it comprise…Cash and cash equivalents: it comprise… Cash on hand

Demand deposits: from banks & other financial institutions

Short term highly liquidated investment that are readily convertible to a known amount of cash and that are subject to an insignificant risk of changes in value. (guidance note indicates that an investment normally meets the definition of a cash equivalents when it has a maturity of 3 months or less from the date of acquisition)

Equity investment are normally excluded, unless they are, in substance , cash equivalents.

Bank Overdrafts: which are repayable on demand and which form an integral part of an enterprise’s cash management are also included as a component of cash and cash equivalents.

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Cash Flows from operating activities:Cash Flows from operating activities:

Operating activities are the main revenue –producing activities of the enterprises that are not investing or financial activities.

Some example of operating activities:

i) Cash received from customers from sale of goods or service provided

ii) Cash paid to suppliers towards purchase of goods or servicesiii) Cash paid to employees towards salary wages and for others claimsiv) Interest/Dividend paid (in case non-financial institututions IAS-7

provide an option to consider the same as operating or financing, but it should be consistently followed during the entire period)

v) Taxes paid (unless they can be specifically identified with Financing or investing activities)

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Cash Flows from investing activities:Cash Flows from investing activities:

Investing activities are the acquisition and disposal of long term assets and other investments that are not considered to be cash & cash equivalents.

Some example of investing activities:-

i) Sale /Purchase of fixed assetsii) Investing in long term investmentsiii) Investment /acquisition/disposal of subsidiaries/JVs/ Associatesiv) Interest /dividends received on deposits/investments. (IAS-7

provide an option to consider the same under operating activities also.)

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Cash Flows from financing activities:Cash Flows from financing activities:

Financing activities are the activities that alter the equity capital and borrowing structure of the enterprise.

Some example of Financing activities:-

i) Issue of shares/debenturesii) Buy back of equity sharesiii) Redemption of preference shares/debentureiv) Long term loans which are not Cash & cash Equivalent and

payment thereofv) Interest/dividends paid on Loans/ to shareholders.

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Accounting Framework:Accounting Framework:

Presentation of cash flowsPresentation of cash flows

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Cash flows from operating Activities can be Cash flows from operating Activities can be

calculated by using two mentods:-calculated by using two mentods:-

i) Direct method ii) Indirect method (acceptable but preferred)

The direct method shows each major class of gross receipts & cash payments. The operating cash flows section of the statements of cash flows under the direct method would appear something like this :-

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Cash receipts from customers xxx

Cash paid to suppliers xxx

Cash paid to employees xxx

Cash paid for others operating expenses xxx

Interest paid xxx

Income tax paid xxx

NET CASH FLOWS FROM OPERATING ACTIVITIES XXXX

Indirect method (most common in practice)Indirect method (most common in practice)

The Indirect method adjust accrual basis net profits or loss for the effects of non cash transactions. Cash flows section of the statement of cash flows under indirect method would appear something like this :-

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Profit before Interest and Income Taxes   xxx

Add back Deprciation   xxx

Add back amortisation of Goodwill   xxx

Increase in receivables   xxx

Decrease in Inventories   xxx

Increase in Trade Payables   xxx

Interest expense xxx  

Less: Interest accrued but not yet paid xxx  

Interest paid   xxx

Income tax paid   xxx

Net cash flows from Operating Activities   xxxx

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