16
Accounting Standard (AS) 3
Cash Flow Statements
Contents
OBJECTIVE
SCOPE Paragraphs 1-2
BENEFITS OF CASH FLOW INFORMATION 3-4
DEFINITIONS 5-7
Cash and Cash Equivalents 6-7
PRESENTATION OF A CASH FLOW STATEMENT 8-17
Operating Activities 11-14
Investing Activities 15-16
Financing Activities 17
REPORTING CASH FLOWS FROM OPERATING
ACTIVITIES 18-20
REPORTING CASH FLOWS FROM INVESTING AND
FINANCING ACTIVITIES 2 1
REPORTING CASH FLOWS ON A NET BASIS 22-24
FOREIGN CURRENCY CASH FLOWS 25-27
EXTRAORDINARY ITEMS 28-29
INTEREST AND DIVIDENDS 30-33
TAXES ON INCOME 34-35
Continued../..
17
INVESTMENTS IN SUBSIDIARIES, ASSOCI
A
TES AND
JOINT VENTURES 3 6
ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES
AND OTHER BUSINESS UNITS 37-39
NON-CASH TRANSACTIONS 40-41
COMPONENTS OF CASH AND CASH EQUIVALENTS 42-44
OTHER DISCLOSURES 45-48
ILLUSTRATIONS
Cash Flow Statements 53
Accounting Standard (AS) 3
Cash Flow Statements
(Thi
s
A
ccountin
g
S
tanda
r
d include
s
p
aragraph
s
s
et in bold
i
t
alic type
and plain type, which have equal authority. Paragraphs in bold italic
type indicate the main principles. This Accounting Standard should b
e
read in the context of its objective and the General Instructions
contained in part A of the Annexure to the Notification.)
This Accounting Standar
d
is not mandato
r
yfo
r
Small an
d
Mediu
m
Size
d
Companies, as defined in the Notification. Such companies are howeve
r
encoura
g
e
d
to compl
y
with the Standard.
Ob
j
ective
Information about the cash flows of an enterprise is useful in providing users
of financial statements with a basis to assess the ability of the enterprise
to generate cash and cash equivalents and the needs of the enterprise t
o
utilise those cash flows. The economic decisions that are taken by user
s
require an evaluation of the ability of an enterprise to generate cash an
d
cash equivalents and the timing and certainty of their generation.
The Standard deals with the provision of information about the historica
l
changes in cash and cash equivalents of an enterprise by means of a cas
h
flow statement which classifies cash flows during the period from operating
,
investing and financing activities.
Scope
1. An enterprise should prepare a cash flow statement and should
p
resent it for each period for which financial statements are
p
resented.
2. Use
r
s of an enterprise’s financial statements a
r
eintereste
d
in how the
enterprise generates and uses cash and cash equivalents. This is the cas
e
regardless of the nature of the enterprise’s activities and irrespective o
f
whether cash can be viewed as the product of the enterprise, as may be th
e
case with a financial enterprise. Enterprises need cash for essentially th
e
same reasons, however different their principal revenue-producing activitie
s
might be. They need cash to conduct their operations, to pay their obligations
,
and to provide returns to their investors.
Cash Flow Statements 19
Benefits of Cash Flow Information
3. A cash flow statement, when used in conjunction with the other financial
statements, provides information that enables users to evaluate the change
s
in net assets of an enterprise, its financial structure (including its liquidity an
d
solvency) and its ability to affect the amounts and timing of cash flows i
n
order to adapt to changing circumstances and opportunities. Cash flo
w
information is useful in assessing the ability of the enterprise to generat
e
cash and cash equivalents and enables users to develop models to assess
and compare the present value of the future cash flows of differen
t
enterprises. It also enhances the comparability of the reporting of operatin
g
p
erformance by different enterprises because it eliminates the effects o
f
using different accounting treatments for the same transactions and events.
4. Historical cash flow information is often use
d
as an indicato
r
of the
amount, timing and certainty of future cash flows. It is also useful in checkin
g
the accuracy of past assessments of future cash flows and in examining th
e
relationship between profitability and net cash flow and the impact o
f
changing prices.
Definitions
5. The following terms are used in this Standard with the meanings
s
peci
f
ied:
5.1 Cash
com
p
rises cash on hand and demand de
p
osits wi
t
h banks.
5.2 Cash equivalents
are short term
,
hi
g
h
l
y
liquid investments tha
t
are readily convertible into known amounts of cash and which ar
e
sub
j
ec
t
t
o an insi
g
ni
f
ican
t
risk o
f
chan
g
es
i
nvalue.
5.3 Cash
f
lows are in
f
lows and out
f
lows o
f
cash and cash equivalents.
5.4 Operating activities are the principal revenue-producing activities
of the enterprise and other activities that are not investing o
r
financing activities.
5.5 Investing activities are the acquisition and disposal of long-term
assets and other investments not included in cash equivalents.
5.6
F
inancin
g
activities are activities tha
t
resul
t
i
nchan
g
es
i
nthe siz
e
and composition of the owners’ capital (including preference shar
e
capital in the case of a company) and borrowings of the enterprise.
20 AS
3
Cash and Cash Equivalents
6. Cash equivalents are held for the purpose of meeting short-term cas
h
commitments rather than for investment or other purposes. For an investment
to qualify as a cash equivalent, it must be readily convertible to a know
n
amount of cash and be subject to an insignificant risk of changes in value
.
Therefore, an investment normally qualifies as a cash equivalent only whe
n
it has a short maturity of, say, three months or less from the date of acquisition
.
Investments in shares are excluded from cash equivalents unless they are, i
n
substance, cash equivalents; for example, preference shares of a compan
y
acquired shortly before their specified redemption date (provided there i
s
only an insignificant risk of failure of the company to repay the amount a
t
maturity).
7. Cash flows exclude movements
b
etween items that constitute cash o
r
cash equivalents because these components are part of the cash management
of an enterprise rather than part of its operating, investing and financin
g
activities. Cash management includes the investment of excess cash in cas
h
equivalents.
Presentation of a Cash Flow Statement
8. The cash flow statement should report cash flows during the
p
erio
d
classified by operating, investing and financing activities.
9. An enterprise presents its cash flows from operating, investing and
financing activities in a manner which is most appropriate to its
b
usiness
.
Classification by activity provides information that allows users to assess th
e
impact of those activities on the financial position of the enterprise and th
e
amount of its cash and cash equivalents. This information may also be use
d
to evaluate the relationships among those activities.
10. A single transaction may include cash flows that are classified
differently. For example, when the instalment paid in respect of a fixed asse
t
acquired on deferred payment basis includes both interest and loan, the interes
t
element is classified under financing activities and the loan element i
s
classified under investing activities.
Operatin
g
Activities
11. The amount of cash flows arising from operating activities is a ke
y
indicator of the extent to which the operations of the enterprise have generate
d
sufficient cash flows to maintain the operatin
g
capabilit
y
of the enterprise
,
Cash Flow Statements 21
p
ay dividends, repay loans an
d
make new investments without recourse t
o
external sources of financing. Information about the specific components o
f
historical operating cash flows is useful, in conjunction with other information,
in forecasting future operating cash flows.
12. Cash flows fro
m
operating activities a
r
e primarily derive
d
from the
p
rincipal revenue-producing activities of the enterprise. Therefore
,
they generally result from the transactions and other events that ente
r
into the determination of net profit or loss. Examples of cash flows fro
m
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 fo
r
premiums and claims, annuities and other policy benefits;
(f) cash payments or refunds of income taxes unless they can
b
e
specifically identified with financing and investing activities; and
(g) cash receipts and payments relating to futures contracts, forwar
d
contracts, option contracts and swap contracts when the contract
s
are held for dealing or trading purposes.
13. Some transactions, such as the sale of an ite
m
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 fro
m
investi
n
g
activities.
14. An enterprise may hold securities and loans for dealing or trading
p
urposes, in which case they are similar to inventory acquired specificall
y
for resale. Therefore, cash flows arising from the purchase and sale of dealing
or trading securities are classified as operating activities. Similarly, cas
h
advances and loans made by financial enterprises are usually classified a
s
operating activities since they relate to the main revenue-producing activit
y
of that enterprise.
Investin
g
Activities
15. The separate disclosure of cash flows arising from investing activities
22 AS
3
is importa
n
t
b
ecause the cash flows represent the extent
t
o which expenditures
have been made for resources intended to generate future income and cas
h
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 capitalised research an
d
development costs and self-constructed fixed assets;
(
b
)
cash recei
p
ts fro
m
dis
p
osal of fixe
d
asse
t
s
(
includi
n
g
intan
g
ibles
)
;
(c) cash payments to acqui
r
eshares,warrantso
r
debt instruments o
f
other enterprises and interests in joint ventures (other tha
n
payments for those instruments considered to be cash equivalent
s
and those held for dealing or trading purposes);
(d) cash receipts fro
m
disposal of shares, warrants o
r
debt instrument
s
of other enterprises and interests in joint ventures (other tha
n
receipts from those instruments considered to be cash equivalent
s
and those held for dealing or trading purposes);
(e) cash advances and loans made to third parties (other tha
n
advances and loans ma
d
eb
y
a financial enterprise);
(f) cash receipts fro
m
the repayment of advances an
d
loans made to
third parties (other than advances and loans of a financial
enterprise);
(g) cash payments for futures contracts, forward contracts, optio
n
contracts and swap contracts except when the contracts are hel
d
for dealing or trading purposes, or the payments are classified a
s
financing activities; and
(h) cash receipts fro
m
futures contracts, forwa
r
d contracts, optio
n
contracts and swap contracts except when the contracts are hel
d
for dealing or trading purposes, or the receipts are classified a
s
financing activities.
16. Whe
n
a contrac
t
is accounted fo
r
as a hedge of an identifiable position,
the cash flows of the contract are classified in the same manner as the cas
h
flows of the position being hedged.
Financin
g
Activities
Cash Flow Statements 23
17. The separate disclosure of cash flows arising fro
m
financing activities
is important because it is useful in predicting claims on future cash flows
by
p
roviders of funds (both capital and borrowings) to the enterprise. Examples
of cash flows arising from financing activities are:
(
a
)
cash
p
roceeds fro
m
issuin
g
shares o
r
othe
r
simila
r
instruments;
(b) cash proceeds from issuing debentures, loans, notes,
b
onds, an
d
other short or long-term borrowings; and
(c) cash repayments of amounts borrowed.
Reportin
g
Cash Flo
w
sfromOperatin
g
Activities
18. An enterprise should report cash flows from operating activities
using either:
(a) the direc
t
method
,
whereb
y
ma
j
o
r
classes o
f
g
ross cash receipts
and gross cash payments are disclosed; or
(b) the indirect method, whereby net profit or loss is adjusted
f
o
r
the effects of transactions of a non-cash nature, any de
f
erral
s
or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with
investing or financing cash flows.
19. The direct method provides information which may
b
e useful i
n
estimating future cash flows and which is not available under the indirec
t
method and is, therefore, considered more appropriate than the indirec
t
method. Under the direct method, information about major classes of gros
s
cash receipts and gross cash payments may be obtained either:
(a) fro
m
the accounting records of the enterprise; or
(b) by adjusting sales, cost of sales (interest and similar income an
d
interest expense and similar charges for a financial enterprise
)
and other items in the statement of profit and loss for:
i) changes during the period in inventories and operating
receivables and payables;
24 AS
3
ii) other non-cash items; and
iii) other i tems for whi ch the cash effects are investing o r
financing cash flows.
20. Unde
r
the indirect method, the net cash flow fro
m
operating activities
is determined by adjusting net profit or loss for the effects of:
(a) changes during the perio
d
in inventories an
d
operating receivable
s
and payables;
(b) non-cash items such as depreciation, provisions, deferred taxes,
and unrealise
d
forei
g
nexchan
g
e
g
ains an
d
losses; and
(c) all othe
r
ite
m
sfo
r
which the cash effects a
r
einvesti
n
go
r
financin
g
cash flows.
Alternativel
y
, the net cash flow from operating activities may
b
e presente
d
under the indirect method by showing the operating revenues and expense
s
excluding non-cash items disclosed in the statement of profit and loss an
d
the changes during the period in inventories and operating receivables an
d
p
ayables.
Reporti
n
g
Cash Flo
w
sfromInvesti
n
g
a
n
dFinancin
g
Activities
21. An enterprise should report separately major classes of gross cas
h
receipts and gross cash payments arising from investing and
f
inancin
g
activities, except to the extent that cash flows described in
p
ara
g
raph
s
22 and 24 are reported on a net basis.
Reportin
g
Cash Flows on a Net Basis
22. Cash flows arising from the following operating, investing o
r
f
inancing activities may be reported on a net basis:
(a) cash receipts and
p
a
y
men
t
sonbeha
l
f
o
f
custome
r
swhen the
cash flows reflect the activities of the customer rather than
those of the enterprise; and
Cash Flow Statements 25
(b) cash receip
t
s and
p
a
y
men
t
s
f
or items
i
n which the turnove
r
is quick, the amounts are large, and the maturities are short.
23. Examples of cash receipts an
d
payments referre
d
to in paragraph 22(a)
are:
(
a
)
the acce
p
tance an
d
re
p
a
y
ment of deman
d
de
p
osits
b
y
a
b
ank;
(
b
)
funds hel
d
fo
r
customers b
y
an investment enter
p
rise; an
d
(c) rents collected on
b
ehalf of, and paid over to, the owners o
f
properties.
Examples of cash receipts an
d
payments referre
d
to in paragraph 22(b) ar
e
advances made for, and the repayments of:
(
a
)
p
rinci
p
al amounts relatin
g
to credit ca
r
dcustomers;
(b) the purchase an
d
sale of investments; and
(c) other short-term borrowings, for example, those which have
a
maturity period of three months or less.
24. Cash flows arising from each of the following activities of a
f
inancial enterprise may be reported on a net basis:
(a) cash receipts and payments for the acceptance and repa
y
ment
of deposits with a fixed maturity date;
(b) the placement of deposits with and withdrawal of deposits
from other financial enterprises; and
(c) cash advances and loans made to customers and the
repayment of those advances and loans.
Foreign Currency Cash Flows
25. Cash flows arising from transactions in a foreign currency should
be recorded in an enterprise’s reporting currency by applying to the
f
orei
g
n currency amount the exchange rate between the reportin
g
currency and the foreign currency at the date of the cash flow. A rat
e
that approximates the actual rate may be used if the result is substantiall
y
the same as would arise if the rates at the dates of the cash flows were
26 AS
3
used
.
The e
ff
ect o
f
chan
g
es in exchan
g
e rates on cash and cash
equivalents held in a foreign currency should be reported as a separat
e
p
a
r
t of the reconciliation of the changes in cash and cash equivalent
s
during the period.
26. Cash flows denominate
d
in foreign currency a
r
ereporte
d
in a manne
r
consistent with Accounting Standard (AS) 11, The Effects of Changes i
n
Foreign Exchange Rates. This permits the use of an exchange rate tha
t
approximates the actual rate. For example, a weighted average exchang
e
rate for a period may be used for recording foreign currency transactions.
27. Unrealise
d
gains an
d
losses arising fro
m
changes in foreign exchange
rates are not cash flows. However, the effect of exchange rate changes o
n
cash and cash equivalents held or due in a foreign currency is reported i
n
the cash flow statement in order to reconcile cash and cash equivalents a
t
the beginning and the end of the period. This amount is presented separatel
y
from cash flows from operating, investing and financing activities and include
s
the differences, if any, had those cash flows been reported at the end-of
-
p
eriod exchange rates.
Extraordinary Items
28. The cash flows associated with extraordinary items should b
e
classified as arising from operating, investing or financing activities a
s
appropriate and separately disclosed.
29. The cash flows associated with extraordinary items are disclose
d
separately as arising from operating, investing or financing activities in th
e
cash flow statement, to enable users to understand their nature and effect o
n
the present and future cash flows of the enterprise. These disclosures are i
n
addition to the separate disclosures of the nature and amount of extraordinar
y
items required by Accounting Standard (AS) 5, Net Profit or Loss for th
e
Period, Prior Period Items and Changes in Accounting Policies.
Interest and Dividends
30. Cash flows from interest and dividends received and paid shoul
d
each be disclosed separately. Cash flows arising from interest paid an
d
interest and dividends received in the case of a financial enterpris
e
s
hou
l
d be classified as cash flows arising from operating activities.
In
the case of other enterprises, cash flows arising from interest paid shoul
d
be classified as cash flows from financing activities while interest an
d
dividends received should be classified as cash flows from investin
g
Cash Flow Statements 27
activities
.
D
ividends
p
aid shou
l
d be classi
f
ied as cash
f
lows
f
rom
f
inancing activities.
31. The total amount of interest paid during the period is disclosed in the
cash flow statement whether it has been recognised as an expense in th
e
statement of profit and loss or capitalised in accordance with Accountin
g
Standard (AS) 10, Accounting for Fixed Assets.
32. Interest pai
d
an
d
interest an
d
dividends receive
d
are usually classified
as operating cash flows for a financial enterprise. However, there is n
o
consensus on the classification of these cash flows for other enterprises.
Some argue that interest paid and interest and dividends received may
be
classified as operating cash flows because they enter into the determinatio
n
of net profit or loss. However, it is more appropriate that interest paid an
d
interest and dividends received are classified as financing cash flows an
d
investing cash flows respectively, because they are cost of obtaining financia
l
resources or returns on investments.
33. Some argue that dividends pai
d
may
b
e classifie
d
as a component o
f
cash flows from operating activities in order to assist users to determine th
e
ability of an enterprise to pay dividends out of operating cash flows. However,
it is considered more appropriate that dividends paid should be classified a
s
cash flows from financing activities because they are cost of obtaining financia
l
resources.
Taxes on Income
34. Cash flows arising from taxes on income should be separatel
y
disclosed and should be classified as cash flows from operating activitie
s
unless they can be specifically identified with financing and investin
g
activities.
35.
T
axes on income arise on transactions that give rise to cash flows that
are classified as operating, investing or financing activities in a cash flo
w
statement. While tax expense may be readily identifiable with investing o
r
financing activities, the related tax cash flows are often impracticable t
o
identify and may arise in a different period from the cash flows of th
e
underlying transactions. Therefore, taxes paid are usually classified as cas
h
flows from operating activities. However, when it is practicable to identif
y
the tax cash flow with an individual transaction that gives rise to cash flow
s
that are classified as investing or financing activities, the tax cash flow i
s
classified as an investing or financing activity as appropriate. When tax cash
28 AS
3
flow a
r
e allocate
d
ove
r
mo
r
e than one class of activit
y
, the total amount o
f
taxes paid is disclosed.
Investments in Subsidiaries, Associates and Joint
Ventures
36. When accounting for an investment in an associate or a subsidiar
y
or a joint venture, an investor restricts its reporting in the cash
f
lo
w
s
tatement to the cash flows between itself and the investee/joint venture
,
f
or example, cash flows relating to dividends and advances.
Acquisitions a
n
d Disposals o
f
Subsidiaries a
n
dOthe
r
Business Units
37. The aggregate cash flows arising from acquisitions and
f
ro
m
disposals of subsidiaries or other business units should be
p
resente
d
s
eparate
l
y and classified as investing activities.
38
.
An enterprise should disclose
,
i
n a
gg
re
g
ate
,
i
n respect o
f
both
acquisition and disposal of subsidiaries or other business units durin
g
the
p
eriod each o
f
the
f
ollowin
g
:
(a) the tota
l
p
urchase o
r
disposa
l
consideration; and
(b) the portion of the purchase or disposal consideration
discharged by means of cash and cash equivalents.
39. The separate presentation of the cash flow effects of acquisitions and
disposals of subsidiaries and other business units as single line items helps t
o
distinguish those cash flows from other cash flows. The cash flow effects o
f
disposals are not deducted from those of acquisitions.
Non-cash Transactions
40
.
I
nvestin
g
and
f
inancin
g
transactions that do not requi
r
e the use
of cash or cash equivalents should be excluded from a cash
f
lo
w
s
tatement. Such transactions should be disclosed elsewhere in th
e
f
inancial statements in a way that provides all the relevant in
f
ormatio
n
about these investin
g
and
f
inancin
g
activities.
Cash Flow Statements 29
41. Many investing an
d
financing activities do not have a direct impact on
current cash flows although they do affect the capital and asset structure o
f
an enterprise. The exclusion of non-cash transactions from the cash flo
w
statement is consistent with the objective of a cash flow statement as thes
e
items do not involve cash flows in the current period. Examples of non-cas
h
transactions are:
(
a
)
the ac
q
uisition of assets
by
assumin
g
directl
y
relate
d
liabilities;
(
b
)
the ac
q
uisition of an enter
p
rise
b
y
means of issue of shares; an
d
(
c
)
the conversion of debt to e
q
uit
y
.
Components o
f
Cash and Cash Equivalents
42. An enterprise should disclose the components of cash and cas
h
equivalents and should present a reconciliation of the amounts in its cas
h
f
low statement with the equivalent items reported in the balance sheet.
43. In view of the variety of cash management practices, an enterprise
discloses the policy which it adopts in determining the composition of cas
h
and cash equivalents.
44. The effect of any change in the policy fo
r
determining components o
f
cash and cash equivalents is reported in accordance with Accounting Standard
(AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes i
n
Accounting Policies.
Other Disclosures
45. An enterprise should disclose, together with a commentary by
management, the amount of significant cash and cash equivalen
t
balances held by the enterprise that are not available for use by it.
46. There a
r
e various circumstances in which cash an
d
cash equivalent
balances held by an enterprise are not available for use by it. Example
s
include cash and cash equivalent balances held by a branch of the enterpris
e
that operates in a country where exchange controls or other legal restriction
s
apply as a result of which the balances are not available for use by th
e
enterprise.
30 AS
3
47. Additional information may
b
e relevant to users in understanding
the financial position and liquidity of an enterprise. Disclosure of thi
s
information, together with a commentary by management, is encourage
d
and may include:
(a) the amount of undrawn
b
orrowing facilities that may
b
e available
for future operating activities and to settle capital commitments
,
indicating any restrictions on the use of these facilities; and
(b) the aggregate amount of cash flows that represent increases i
n
operating capacity separately from those cash flows that ar
e
required to maintain operating capacity.
48. The separate disclosure of cash flows that represent increases in
operating capacity and cash flows that are required to maintain operatin
g
capacity is useful in enabling the user to determine whether the enterprise i
s
investing adequately in the maintenance of its operating capacity. A
n
enterprise that does not invest adequately in the maintenance of its operatin
g
capacity may be prejudicing future profitability for the sake of current liquidit
y
and distributions to owners.
I
llustration
I
Cash Flow Statements 31
Cash Flow Statement for an Enterprise other than a Financia
l
Enterprise
Thi
s
illustration doe
s
not
f
orm
p
art o
f
the accountin
g
s
tanda
r
d. Its
p
urpose is to illustrate the application of the accounting standard.
1. The illustration shows onl
y
current
p
erio
d
amounts.
2. Information fro
m
the statement of profit an
d
loss an
d
b
alance sheet is
p
rovided to show how the statements of cash flows under the direct metho
d
and the indirect method have been derived. Neither the statement of profi
t
and loss nor the balance sheet is presented in conformity with the disclosur
e
and presentation requirements of applicable laws and accounting standards
.
The working notes given towards the end of this illustration are intended t
o
assist in understanding the manner in which the various figures appearin
g
in the cash flow statement have been derived. These working notes d
o
not form part of the cash flow statement and, accordingly, need not
be
3. The following additional information is also relevant fo
r
the preparation
of the statement of cash flows (figures are in Rs.’000).
(a) An amount of 250 was raise
d
fro
m
theissueofsharecapital an
d
a
further 250 was raised from long term borrowings.
(b) Interest expense was 400 of which 170 was pai
d
during the period.
100 relating to interest expense of the prior period was also pai
d
durin
g
the period.
(
c
)
Dividends
p
ai
d
we
r
e 1,200.
(
d
)
T
ax deducte
d
at source on dividends receive
d
(include
d
in the ta
x
expense of 300 for the year) amounted to 40.
(e) During the perio
d
, the enterprise acquire
d
fixe
d
assets fo
r
350.
The payment was made in cash.
(f) Plant with original cost of 80 an
d
accumulated depreciation of 60
was sold for 20.
(g) Foreign exchange loss of 40 represents the reduction in the carryin
g
32 AS
3
amount of a short-ter
m
investment in foreign-currency designate
d
bonds arising out of a change in exchange rate between the date o
f
acquisition of the investment and the balance sheet date.
(h) Sundry debtors and sundry creditors include amounts relating t
o
credit sales and credit purchases only.
Balance Sheet as at 31.12.199
6
(
Rs. ’000
)
Assets
199
6
1995
Cash on hand an
d
b
alances with
b
an
k
s 200
2
5
Short-term investments 670 135
Sundry debtors 1,700 1,200
Interest receivable 100 –
Inventories 900 1,950
Long-term investments 2,500 2,500
Fixed assets at cost 2,180 1,910
Accumulated depreciation (1,450) (1,060)
Fixed assets (net) 730 850
Total assets 6,800 6,660
Liabilities
Sundry creditors 150 1,890
Interest payable 230 100
Income taxes payable 400 1,000
Long-term debt 1,110 1,040
Total liabilities 1,890 4,030
Shareholders’ Funds
Share capital 1,500 1,250
Reserves 3,410
1,380
Total shareholders’ funds 4,910
2,630
Total liabilities and shareholders’ funds 6,800
6,660
Cash Flow Statements 33
Statement of Profit and Loss for the period ended 31.12.1996
(Rs. ’000)
Sales 30,650
Cost of sales (26,000)
Gross profit 4,650
Depreciation (450)
Administrative and selling expenses (910)
Interest expense (400)
Interest income 300
Dividend income 200
Foreign exchange loss (40)
N
et profit before taxation and extraordinary item 3,350
Extraordinary item – Insurance proceeds from
earthquake disaster settlement 180
N
et profit after extraordinary item 3,530
Income-tax (300)
N
et profit 3,230
Direct Method Cash Flow Statement [Para
g
raph 18(a)]
(Rs. ’000)
1996
Cash flows from operatin
g
activities
Cash receipts from customers 30,150
Cash paid to suppliers and employees (27,600)
Cash generated from operations 2,550
Income taxes paid (860)
Cash flow before extraordinary item 1,690
Proceeds from earthquake disaster settlement 180
N
et cash from operating activities 1,870
Cash flows from investing activities
Purchase of fixed assets (350)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 160
N
et cash from investing activities 30
34 AS
3
Cash flows from financin
g
activities
Proceeds from issuance of share capital 250
Proceeds from long-term borrowings 250
Repayment of long-term borrowings
(180)
Interest paid
(270)
Dividends paid (1,200)
N
et cash used in financing activities (1,150)
Net increase in cash and cash equivalents 750
Cash and cash equivalents at beginning of period
(see Note 1) 160
Cash and cash equivalents at end of period
(see Note 1) 910
Indirect Method Cash Flow Statement [Para
g
raph 18(b)]
(Rs. ’000)
1996
Cash flows from operatin
g
activities
N
et profit before taxation, and extraordinary item 3,350
Adjustments for :
Depreciation 450
Foreign exchange loss 40
Interest income (300)
Dividend income (200)
Interest expense 400
Operating profit before working capital changes 3,740
Increase in sundry debtors (500)
Decrease in inventories 1,050
Decrease in sundry creditors (1,740)
Cash generated from operations 2,550
Income taxes paid (860
)
Cash flow before extraordinary item 1,690
Proceeds from earthquake disaster settlement 180
N
et cash from operating activities 1,870
Cash Flow Statements 35
Cash flows from investin
g
activities
Purchase of fixed assets (350)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 160
N
et cash from investing activities 30
Cash flows from financing activities
Proceeds from issuance of share capital 250
Proceeds from long-term borrowings 250
Repayment of long-term borrowings (180)
Interest paid (270)
Dividends paid (1,200)
N
et cash used in financing activities (1,150)
Net increase in cash and cash equivalents 750
Cash and cash equivalents at beginning of period
(see Note 1) 160
Cash and cash equivalents at end of period (see Note 1) 910
Notes to the cash flow statement
(direct method and indirect method)
1. Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and balances with
b
anks
,
and investments in money-market instruments. Cash and cash equivalent
s
included in the cash flow statement comprise the following balance shee
t
amounts.
1996 1995
Cash on hand an
d
b
alances with
b
an
k
s 200
2
5
Short-term investments 670 135
Cash and cash equivalents 870 160
Effect of exchange rate changes 40 –
Cash an
d
cash equivalents as restated 910 160
36 AS
3
Cash an
d
cash equivalents at the en
d
of the perio
d
include deposits wit
h
banks of 100 held by a branch which are not freely remissible to the company
because of currency exchange restrictions.
The company has undrawn
b
orrowing facilities of 2,000 of which 700 ma
y
be used only for future expansion.
2.
T
otal tax pai
d
during the year (including tax deducted at source on
dividends received) amounted to 900.
Alternative Presentation (indirect method)
As an alternative, in an indirect method cash flow statement, operating profi
t
b
efo
r
e workin
g
capital chan
g
es is sometimes presente
d
as follows:
Revenues excluding investment income 30,650
Operating expense excluding depreciation (26,910)
Operating profit before working capital changes 3,740
W
orkin
g
Notes
The working notes given below do not form part of the cash flow
s
tatemen
t
and, accordingly, need not be published. The purpose of thes
e
working notes is merely to assist in understanding the manner i
n
which various figures in the cash flow statement have been derived.
(Figures are in Rs. ’000.)
1. Cash recei
p
ts from customers
Sales 30,650
Add: Sundry debtors at the beginning of the year 1,200
31,850
Less : Sundry debtors at the end of the year 1,70
0
30,150
Cash Flow Statements 37
2. Cash paid to suppliers and emplo
y
ees
Cost of sales 26,000
Administrative and selling expenses 910
26,910
Ad
d
: Sund
r
y credito
r
satthe
b
eginning of the 1,890
year
Inventories at the end of the year 900
2,790
29,700
Less: Sund
r
y credito
r
sattheen
d
of the yea
r
150
Inventories at the beginning of the year 1,950
2,100
27,600
3. Income taxes paid (includin
g
tax deducted at source from
dividends received)
Income tax expense for the year (including tax deducted 300
at source from dividends received)
Add : Income tax liability at the beginning of the year 1,000
1,300
Less: Income tax liability at the end of the year 400
900
Out of 900, tax deducte
d
at source on dividends receive
d
(amounting to 40
)
is included in cash flows from investing activities and the balance of 860 i
s
included in cash flows from operating activities (see paragraph 34).
4. Repa
y
ment of lon
g
-term borrowin
g
s
Long-term debt at the beginning of the year 1,040
Add : Long-term borrowings made during the year 250
1,290
Less : Long-term borrowings at the end of the year 1,110
180
5. Interest paid
Interest expense for the year 400
Add: Interest payable at the beginning of the year 100
500
Less: Interest payable at the end of the year 230
270
38 AS
3
I
llustration II
Cash Flow Statement for a Financial Enterprise
Thi
s
illustration doe
s
not
f
orm
p
art o
f
the accountin
g
s
tanda
r
d. Its
p
urpose is to illustrate the application of the accounting standard.
1. The illustration shows only current period amounts.
2. The illustration is presented using the direct method.
Cash flows from o
p
eratin
g
activities
(Rs. ’000)
1996
Interest an
d
commission receipts 28,447
Interest payments (23,463)
Recoveries on loans previously written off 237
Cash payments to employees and suppliers (997)
Operating profit before changes in operating assets 4,224
(Increase) decrease in operating assets:
Short-term funds (650)
Deposits held for regulatory or monetary control purposes 234
Funds advanced to customers (288)
N
et increase in credit card receivables (360)
Other short-term securities (120)
I
ncrease (decrease) in operating liabilities:
Deposits from customers 600
Certificates of deposit (200)
N
et cash from operating activities before income tax 3,440
Income taxes paid (100)
N
et cash from operating activities 3,340
Cash flows from investing activities
Dividends received 250
Interest received 300
Proceeds from sales of permanent investments 1,200
Purchase of permanent investments (600)
Purchase of fixed assets (500)
N
et cash from investing activities 650
Cash Flow Statements 39
Cash flows from financin
g
activities
Issue of shares 1,800
Repayment of long-term borrowings
(200)
N
et decrease in other borrowings (1,000)
Dividends paid
(400)
N
et cash from financing activities 200
Net increase in cash and cash equivalents 4,190
Cash and cash equivalents at beginning of period 4,650
Cash and cash equivalents at end of period 8,840
