This document discusses Indian Accounting Standard 7 (Revised 2016) on cash flow statements. It defines key terms like cash flows and cash equivalents. It explains the objective is to classify cash flows from operating, investing and financing activities to assess a firm's ability to generate cash flows. The direct and indirect methods for preparing the cash flow statement are described. Treatment of taxes, interest, dividends and extraordinary items are also covered. Differences between AS 3 and AS 7 are highlighted.
2. OVERVIEW
Meaning of Cash Flow Statements
Features of Cash Flow Statements
Indian Accounting Standard 7
Objective
Scope
Benefits
Limitations
Definitions
Presentation of CFS
Difference between AS3 & AS7
References and Sources
3. MEANING OF CASH FLOW STATEMENT
A cash flow statement is a statement of
changes in the financial position of a firm
on cash basis.
It shows the various sources (i.e., inflows)
and applications (i.e., outflows) of cash
during a particular period and their net
impact on the cash balance.
4. FEATURES OF CASH FLOW STATEMENT:
It is a periodical statement as it covers a particular period
of time, say, month or year.
It shows the sources and application of funds during that
period of time.
A projected cash flow statement is referred to as cash
budget.
It is an indicator of cash earning capacity of the firm.
It reflects clearly how financial position of a firm changes
over a period of time due to its operating activities,
investing activities and financing activities.
6. OBJECTIVE OF THIS STANDARD
Information about the cash flows of an entity is useful
in providing users of financial statements with a basis
to assess the ability of the entity to generate cash and
cash equivalents and the needs of the entity to utilise
those cash flows.
CFS helps the users
To assess the ability of a firm to pay its obligations as soon as
it becomes due;
To analyze and interpret the various transactions for future
courses of action;
To see the cash generation ability of a firm;
To ascertain the cash and cash equivalent at the end of the
period.
7. OBJECTIVE OF THIS STANDARD
The economic decisions that are taken by users
require an evaluation of the ability of an entity to
generate cash and cash equivalents and the timing
and certainty of their generation.
~Ind AS 3 (Revised 1997) / Ind AS 7 (Revised 2016)
Timing and certainty of generating the inflow of cash helps the
management to take financing decisions in future and helps
users take better economic decisions.
8. OBJECTIVE OF THIS STANDARD
The objective of this Standard is to require the
provision of information about the historical changes in
cash and cash equivalents of an entity by means of a
statement of cash flows which classifies cash flows
during the period from operating, investing and
financing activities.
Inflows of cash and outflows of cash can be measured annually
which arise from operating activities, investing activities and
financial activities
9. SCOPE
An entity shall prepare a statement of cash flows in
accordance with the requirements of this Standard and shall
present it as an integral part of its financial statements for
each period for which financial statements are presented.
Entity - a business for which a separate set of accounting
records is maintained
CFS is an important part of final accounts.
Mandatory to be prepared by listed companies.
Should be prepared every time final accounts are made.
10. Users of an entity’s financial statements are interested in how
the entity generates and uses cash and cash equivalents. This
is the case regardless of the nature of the entity’s activities and
irrespective of whether cash can be viewed as the product of
the entity, as may be the case with a financial institution.
Entities need cash for essentially the same reasons however
different their principal revenue-producing activities might be.
They need cash to conduct their operations, to pay their
obligations, and to provide returns to their investors.
Accordingly, this Standard requires all entities to present a
statement of cash flows.
Stakeholders – interested in cash position of the company
Firms need cash for many reasons – for daily operations, to
make payments, and returns to investors.
Hence, compulsory to make CFS.
11. BENEFITS OF CASH FLOW STATEMENTS
To evaluate the changes in net assets of an entity;
To evaluate 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;
To evaluate the ability of the entity to generate cash and cash
equivalents;
Helps management and users make better financial and
economic decisions;
12. LIMITATIONS OF CFS
It does not show the liquidity position of the firm
It is not a substitute of income statement
It does not show the financial position of the firm in
totality.
It is very difficult to precisely define the term ‘cash’ l
There are controversies over a number of items like
cheques, stamps, postal orders etc. to be included in
cash or not.
13. DEFINITIONS
1. Cash – Includes cash on hand and demand deposits with
banks.
2. Cash equivalents – short-term, highly liquid investments
that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value.
3. Cash flows – Inflows and outflows of cash and cash
equivalents. Transactions which increase the cash position of
the entity are called as inflows of cash and those which
decrease the cash position as outflows of cash.
14. DEFINITIONS
4. Operating activities – The principal revenue-producing
activities of the entity and other activities that are not investing
or financing activities.
5. Investing activities – The acquisition and disposal of
long-term assets and other investments not included in cash
equivalents.
6. Financing activities – Activities that result in changes in
the size and composition of the contributed equity and
borrowings of the entity.
15. PRESENTATION OF A CASH FLOWS
STATEMENT
The statement of cash flow shows three main categories of cash
inflows and cash outflows, namely : operating, investing and
financing activities.
16. OPERATING ACTIVITIES
Meaning – Operating activities are the principal revenue
generating activities of the enterprise.
Objective – 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.
The amount of cash from operations indicate the internal
solvency level of the company.
17. OPERATING ACTIVITIES
Operating Activities
Cash Inflows Cash Outflows
1) Cash Sales
2) Received from Debtor
3) Commission & Fees
4) Royalty Cash
1) Cash Purchases
2) Payment to Creditors
3) Cash Operating Expenses
4) Payment of Wages
5) Income Tax
6) Manufacturing Expenses
18. INVESTING ACTIVITIES
Meaning – Investing activities include the
acquisition and disposal of long term assets and
other investments not included in cash equivalents.
Objective – 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.
19. INVESTING ACTIVITIES
Investing Activities
Cash Inflows Cash Outflows
1) Sale of Fixed Assets
2) Sale of investments
3) Interest Received
4) Dividend Received
5) Working Capital Recovery
1) Purchase of Fixed Assets
2) Purchase of Investments
20. FINANCING ACTIVITIES
Meaning – Activities that result in change in the size
and composition of the owner’s capital (including
Preference share capital in the case of a company)
and borrowings of the enterprise.
Objective – 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.
21. FINANCING ACTIVITIES
Financing Activities
Cash Inflows Cash Outflows
1) Issue of Shares in Cash
2) Issue of Debentures in Cash
3) Proceeds from borrowings
4) Cash proceeds from public deposits
1) Buyback of equity shares
2) Redemption of Preference Shares
3) Redemption of debentures
4) Payment of borrowings
5) Interest Paid on loans, debentures
6) Payment of dividend
22. METHOD OF PREPARING CASH FLOW
STATEMENT
There are two methods of preparing the Cash Flow
Statement : Direct Method and Indirect Method.
Both methods give the same results in respect of
the final total as well as sub-totals of the three
sections – operating, investing and the financing.
They differ only in the manner the information
regarding cash flow from operating activities is
presented.
25. TREATMENT OF EXTRAORDINARY ITEMS
The cash flows associated with extraordinary items should be
classified as arising from operating, investing or financing
activities as appropriate and separately disclosed.
The existing AS 3 requires cash flows associated with
extraordinary activities to be separately classified as arising
from operating, investing and financing activities, whereas Ind
AS 7 does not contain this requirement.
26. TREATMENT OF INTEREST AND DIVIDEND
Enterprise Interest Paid Interest
Received
Dividend
Paid
Dividend
Received
Financial
Operating
Activity
Operating
Activity
Financing
Activity
Operating
Activity
Non
Financial
Financing
Activity
Investing
Activity
Financing
Activity
Investing
Activity
Cash flows from interest and dividends received and paid should
each be disclosed separately.
27. TREATMENT OF TAXES ON INCOME
Cash flows arising from taxes on income shall be
separately disclosed and shall be classified as cash
flows from operating activities unless they can be
specifically identified with financing and investing
activities.
Mandatory to be disclosed
Always operating unless otherwise specified.
28. DIFFERENCE BETWEEN IND AS 7 ON CFS AND THE AS 3 ON
CFS
IND AS 7 IND AS 3
Specifically includes bank overdrafts
which are repayable on demand as a
part of cash and cash equivalents.
Silent on this aspect
Treatment of cash payments to
manufacture or acquire assets held
for rental to others and subsequently
held for sale in the ordinary course of
business as cash flows from
operating activities
Does not contain such requirements.
No mention on the treatment of
extraordinary items
Cash flows associated with
extraordinary activities to be
separately classified as arising from
operating, investing and financing
activities
