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Accounting Standard (AS) 3 Notes

Accounting Standard (AS) 3, Cash Flow Statement (Revised)

Cash Flow Statement 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.

Cash comprises cash on hand and demand deposits with banks.

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.

Cash flows are inflows and outflows of cash and cash equivalents.

Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

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.

Methods of preparing Cash Flow Statement

Direct Method

In this method major classes of gross cash receipts and gross cash payments are disclosed.

Indirect Method

Under this method, the following adjustment to reported net profit or loss to be made:

  • Effects of transactions of non-cash nature.
  • Deferrals in accruals of past or future operating receipt or payments.
  • Changes in current assets and liabilities
  • Income & expenses associated with investing and financing cash flows.

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