“ Statement of Cash Flows” are covered by AS-3 “ Cash Flow Statement ” issued by ICAI*.
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.
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.
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.
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:
Cash received from customers from sale of goods or service provided
Cash paid to suppliers towards purchase of goods or services
Cash paid to employees towards salary wages and for others claims
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)
Taxes paid (unless they can be specifically identified with Financing or 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:-
Sale /Purchase of fixed assets
Investing in long term investments
Investment /acquisition/disposal of subsidiaries/JVs/ Associates
Interest /dividends received on deposits/investments. (IAS-7 provide an option to consider the same under operating activities also.)
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:-
Issue of shares/debentures
Buy back of equity shares
Redemption of preference shares/debenture
Long term loans which are not Cash & cash Equivalent and payment thereof
Interest/dividends paid on Loans/ to shareholders.
Presentation of cash flows
Cash flows from operating Activities can be
calculated by using two mentods:-
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 :-
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)
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 :-
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