AS 3 Cash Flow Statement Format | Applicability | Summary Notes. In the previous articles, we have given AS 19 Leases and it’s Accounting Treatment and AS 20 Earning Per Share (EPS). Today we are providing the complete details of accounting standard 3 Cash Flow Statement I;e objective, scope, definitions, cash flow from operating, investing, financing activities and disclosure requirements. At the end of this article, you can also download AS 3 cash flow statements notes by ICAI. This notes is also useful for CA IPCC students.
AS 3 Cash Flow Statement
The Standard deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.
a). An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented.
b). Users of an enterprise’s financial statements are interested in how the enterprise generates and uses cash and cash equivalents. This is the case regardless of the nature of the enterprise’s activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial enterprise. Enterprises need cash for essentially the same reasons, however different their principal revenue-producing activities might be.They need cash to conduct their operations, to paytheir obligations, and to provide returns to their investors.
The following terms are used in this Standard with the meanings specified:
1. Cash comprises cash on hand and demand deposits with bank.
2. 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.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.
5 Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
6 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
Benefits of Cash Flow Information
1) A cash flow statement, when used in conjunction with the other financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.
2)Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices.
Presentation of a Cash Flow Statement
1) The cash flow statement should report cash flows during the period classified by operating, investing and financing activities.
2) An enterprise presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterprise and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationships among those activities.
3) A single transaction may include cash flows that are classified differently. For example, when the installment paid in respect of a fixed asset acquired on deferred payment basis includes both interest and loan, the interest element is classified under financing activities and the loan element is classified under investing activities.
Classification of Cash Flows as per Accounting Standard-3
While preparing the Cash Flow Statement, the cash flows during the period are classified into 3 major categories:-
- Cash Flow from Operating Activities (Direct Method/ Indirect Method)
- Cash Flow from Investing Activities
- Cash Flow from Financing Activities
Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. 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 futures contracts, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purposes.
Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.An enterprise may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale.Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial enterprises are usually classified as operating activities since they relate to the main revenue-producing activity of that enterprise.
i) Cash Flow from Operating Activity- Direct Method:
While preparing the Cash Flow Statement as per Direct Method, Actual Cash Receipts from Operating Revenues and Actual Cash Payments for Operating Activities are arranged and presented in the Cash Flow Statement. The difference between Cash Receipts and Cash Payments is the Net Cash Flow from Operating Activities under the Direct Method. In other words, it is a Income Statement (Profit & Loss A/c) prepared on Cash Basis under the Direct Method.
ii) Cash Flow from Operating Activity – Indirect Method:
While preparing the Cash Flow Statement as per the Indirect Method, the Net Profit/Loss for the period is used as the base and then adjustments are made for items that affected the Income Statement but did not affect the Cash.
The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flows arising from investing activities are: (
a) cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalized research and development costs and self-constructed fixed assets;
(b) cash receipts from disposal of fixed assets (including intangibles);
(c) cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(d) cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(e) cash advances and loans made to third parties (other than advances and loans made by a financial enterprise.
(f) cash receipts from the repayment of advances and loans made to third parties (other than advances and loans of a financial enterprise);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.
When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged.
The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise. Examples of cash flows arising from financing activities are:
(a) cash proceeds from issuing shares or other similar instruments;
(b) cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings; and
(c) cash repayments of amounts borrowed.
Format and Example
Following is a cash flow statement prepared using indirect method:
|Company A, Inc.|
|Cash Flow Statement|
|For the Year Ended Dec 31, 2016|
|Cash Flows from Operating Activities:|
|Operating Income (EBIT)||489,000|
|Loss on Sale of Equipment||7,300|
|Gain on Sale of Land||−51,000|
|Increase in Accounts Receivable||−84,664|
|Decrease in Prepaid Expenses||8,000|
|Decrease in Accounts Payable||−97,370|
|Decrease in Accrued Expenses||−113,860|
|Net Cash Flow from Operating Activities||269,806|
|Cash Flows from Investing Activities:|
|Sale of Equipment||89,000|
|Sale of Land||247,000|
|Purchase of Equipment||−100,000|
|Net Cash Flow from Investing Activities||136,000|
|Cash Flows from Financing Activities:|
|Payment of Dividends||−90,000|
|Payment of Bond Payable||−200,000|
|Net Cash Flow from Financing Activities||−290,000|
|Net Change in Cash||115,806|
|Beginning Cash Balance||319,730|
|Ending Cash Balance||435,536|
Reporting Cash Flows from Investing and Financing Activities
An enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described below on a net basis.
Reporting Cash Flows on a Net Basis
Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:
- cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the enterprise; and
- cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.
Cash flows arising from each of the following activities of a financial enterprise may be reported on a net basis:
- cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date;
- the placement of deposits with and withdrawal of deposits from other financial enterprises; and
- cash advances and loans made to customers and the repayment of those advances and loans.
1) An enterprise should disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by it.
2) There are various circumstances in which cash and cash equivalent balances held by an enterprise are not available for use by it. Examples include cash and cash equivalent balances held by a branch of the enterprise that operates in a country where exchange controls or other legal restrictions apply as a result of which the balances are not available for use by the enterprise.
3) Additional information may be relevant to users in understanding the financial position and liquidity of an enterprise. Disclosure of this information, together with a commentary by management, is encouraged and may include:
- the amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities; and
- the aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity.
4) The separate disclosure of cash flows that represent increases in operating capacity and cash flows that are required to maintain operating capacity is useful in enabling the user to determine whether the enterprise is 70 AS 3 (revised 1997) investing adequately in the maintenance of its operating capacity. An enterprise that does not invest adequately in the maintenance of its operating capacity may be prejudicing future profitability for the sake of current liquidity and distributions to owners.
Click Here to download AS 3 Cash Flow Statement Format notes by ICAI.
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