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Quick Reference on Accounting Standard (AS) 3

Download Quick Reference on Accounting Standard (AS) 3 Cash Flow Statements

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.

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.

An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, 3 months or less from the date of acquisition.

Presentation of a Cash Flow Statement:

  • The Cash Flow Statement should report cash flows during the period classified by operating, investing and financing activities.
  • The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed.

Operating activities: Principal revenue producing activities and other activities that are not investing or financing activities

Investing activities: Acquisition and disposal of long-term assets and other investments not included in cash equivalents

Financing activities: 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

Reporting methods (Cash flow from operating activities)

  • Direct method – Major classes of gross cash receipts and payments in respect of operating activities are presented
  • Indirect Method – Net Profit/Loss is adjusted for effects of transactions of non-cash nature, deferrals or accruals of past or future operating cash receipts or payments, and income and expense items associated with investing or financing cash flows

Reporting of foreign currency cash flows

  • Cash flows arising from transactions in a foreign currency – To be recorded in the reporting currency of the enterprise using the exchange rate on the date of cash flow
  • Effects of changes in exchange rates on cash and cash equivalents held in a foreign currency – To be reported as a separate part of the reconciliation of the changes in cash and cash equivalents during the period

Classification of Interests and Dividends

  • Non-Financial Enterprises
    • Interest paid – Financing Activities
    • Interest received – Investing Activities
    • Dividend paid – Financing Activities
    • Dividend received – Investing Activities
  • Financial Enterprises
    • Interest paid – Operating Activities
    • Dividend paid – Financing Activities
    • Interest received – Operating Activities
    • Dividend received – Operating Activities

Taxes on Income- Cash flows arising from taxes on income should be separately discloed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

Non-cash Transactions- Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a Cash Flow Statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.

Components of Cash and Cash Equivalents- An enterprise should disclose the components of cash and cash equivalents and should present a reconciliation of the amounts in its Cash Flow Statement with the equivalent items reported in the balance sheet.

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