AS - 3
CASH FLOW STATEMENTS
n Cash flow statement is additional information to user of financial statement
n This statement exhibits the flow of incoming and outgoing cash
n This statement assesses the ability of the enterprise to generate cash and cash equivalents
n It also assesses the needs of the enterprise to utilise the cash and cash equivalents generated
n It also assesses the liquidity and solvency of the enterprise.
n This standard applies to the enterprises:
q Having turnover more than Rs. 50 Crores in a financial year;
q Listed companies;
n Cash flow statement of listed companies shall be presented only under the indirect method as prescribed in AS 3
n CASH comprises cash on hand and demand deposits with banks.
n 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.
n CASH FLOWS are inflows and outflows of cash and cash equivalents.
n Cash Equivalents
q Held for meeting short term commitments
q It is readily convertible into known amounts of cash
q It has a very insignificant risk
q Short maturity (say 3 months maximum)
n Cash flows exclude
q Movements between cash and cash equivalents
n The cash flow statement should report cash flows during the period classified by
q Operating,
q Investing and
q Financing activities.
OPERATING ACTIVITIES
n These are principal revenue producing activities of the enterprise.
n Examples:
q Cash receipts from sale of goods / rendering services;
q Cash receipts from royalties, fees, commissions and other revenue;
q Cash payments to suppliers of goods and service;
q Cash payments to and on behalf of employees.
INVESTMENT ACTIVITIES
n The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities.
n It includes making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc.
n Examples of cash flows arising from investing activities are as follows:
q Cash payments to acquire fixed assets
q Cash receipts from disposal of fixed assets
q Cash payments to acquire shares, warrants or debt instruments of other enterprises and interest in joint ventures
q Cash receipt from disposal of above investments
FINANCING ACTIVITIES
n Those activities that result in changes in size and composition of owner's capital and borrowing of the organization.
n It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.
q Sale of share
q Buy back of shares
q Redemption of preference shares
q Issue / redemption of debentures
q Long term loan / payment thereof
q Dividend / interest paid
q DIRECT METHOD:
n In this method, gross receipts and gross payments of cash are disclosed
q INDIRECT METHOD:
n In this method, profit and loss account is adjusted for the effects of transaction of non-cash nature.
n Interest Received
q Received from investment – it is in investment activities
q Received from short term investment classified, as cash equivalents should be considered as cash inflows from operating activities.
q Received on trade advances and operating receivables should be in operating activities
n Interest Paid
q On loans / debts are in financing activities
q On working capital loan and any other loan taken to finance operating activities are in operating activities
n Cash flow from interest should be separately disclosed.
n Dividend Received
q For financial enterprises – in operating activities
q For other than financial enterprises – in investing activities
n Dividend Paid
q Always classified as financing activities
n Cash flow from dividend should be separately disclosed
n The effect of change in exchange rate in cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of cash and cash equivalents.
n Unrealized gain and losses arising from changes in foreign exchanges rates are not cash flows
n The cash flows associated with extraordinary items should be classified as arising from:
n Operating
n Investing or
n Financing activities
as appropriate and separately disclosed.
Investments in subsidiaries, associates and joint ventures
n Only the cash flow between itself and the investee is required to be reported
n Example:
q Cash flow relating to dividends and advances
Acquisitions and disposals of subsidiaries and other business units
n Cash flow on acquisition and disposal of subsidiaries and other business units should be :
q Presented separately
q Classified as investing activities
q Total purchase and disposal should be disclosed separately
q The position of the purchase / disposal consideration discharged by means of cash and cash equivalents should be disclosed
Non-cash transactions
n These should be excluded from the cash flow statement
n These transactions should be disclosed in the financial statements.
n Examples
q Acquisition of assets by assuming directly related liabilities
q Acquisition of an enterprise by means of issue of equity shares
q Conversion of debt to equity
Disclosures of cash and cash equivalents
n The components of cash and cash equivalents should be disclosed
n Reconciliation of the amount in the cash flow statement with the equivalent items reported in the balance sheet
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