accounting standard-3 cash flow statement by nithin raj

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Cash Flow Statements - Nithin Raja

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Page 1: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Cash Flow Statements

- Nithin Raja

Page 2: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Index Introduction Applicability Definitions Cash and Cash equivalents Features of Cash Flow Statement

Operating Activities Investing Activities Financing Activities

Interest Dividend Foreign Currency transactions Extraordinary items Treatment of Tax Investments in subsidiaries, associates and  joint ventures Acquisitions and disposals of subsidiaries  and other business

units Non-cash transactions

Page 3: Accounting Standard-3 Cash Flow Statement by Nithin Raj

IntroductionCash flow statement is additional information to user of

financial statement

This statement exhibits the flow of incoming and outgoing cash

This statement assesses the ability of the enterprise to generate cash and cash equivalents

It also assesses the needs of the enterprise to utilise the cash and cash equivalents generated

It also assesses the liquidity and solvency of the enterprise.

Page 4: Accounting Standard-3 Cash Flow Statement by Nithin Raj

ApplicabilityThis standard applies to the enterprises:

Having turnover more than Rs. 50 Crores in a financial year;

Listed companies; Cash flow statement of listed companies shall be

presented only under the indirect method as prescribed in AS 3

Page 5: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Definitions 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.

Page 6: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Cash and Cash EquivalentsCash Equivalents

Held for meeting short term commitmentsIt is readily convertible into known amounts of cashIt has a very insignificant risk Short maturity (say 3 months maximum)

Cash flows excludeMovements between cash and cash equivalents

Page 7: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Features of Cash Flow Statement

The cash flow statement should report cash flows during the period classified byOperating,Investing and Financing activities.

Sum of these three types of cash flow reflect net increase or decrease of cash and cash equivalents.

Page 8: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Operating ActivitiesThese are principal revenue producing

activities of the enterprise.

Examples:Cash receipts from sale of goods / rendering

services;

Cash receipts from royalties, fees, commissions and other revenue;

Cash payments to suppliers of goods and service;

Cash payments to and on behalf of employees.

Page 9: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Investment Activities The activities of acquisition and disposal of long term assets

and other investments not included in cash equivalent are investing activities.

It includes making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc.

Examples of cash flows arising from investing activities are as follows: Cash payments to acquire fixed assets

Cash receipts from disposal of fixed assets

Cash payments to acquire shares, warrants or debt instruments of other enterprises and interest in joint ventures

Cash receipt from disposal of above investments

Page 10: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Financing Activities Those activities that result in changes in size and composition

of owners capital and borrowing of the organization.

It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.

Sale of share

Buy back of shares

Redemption of preference shares

Issue / redemption of debentures

Long term loan / payment thereof

Dividend / interest paid

Page 11: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Cash flow from operating activities

It can be derived either from direct method or indirect method

Direct method: In this method, gross receipts and gross payments

of cash are disclosed

Indirect method: In this method, profit and loss account is adjusted

for the effects of transaction of non-cash nature.

Page 12: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Interest Interest Received

Received from investment – it is in investment activities

Received from short term investment classified, as cash equivalents should be considered as cash inflows from operating activities.

Received on trade advances and operating receivables should be in operating activities

Interest Paid On loans / debts are in financing activities

On working capital loan and any other loan taken to finance operating activities are in operating activities

Cash flow from interest should be separately disclosed.

Page 13: Accounting Standard-3 Cash Flow Statement by Nithin Raj

DividendDividend Received

For financial enterprises – in operating activities

For other than financial enterprises – in investing activities

Dividend PaidAlways classified as financing activities

Cash flow from dividend should be separately disclosed

Page 14: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Foreign currency transactionThe effect of changes in foreign exchange

rates should be reported as separate part of the reconciliation of cash and cash equivalents.

Unrealized gain and losses arising from changes in foreign exchanges rates are not cash flows.

Page 15: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Extraordinary itemsThe cash flows associated with extraordinary

items should be classified as arising from:OperatingInvesting orFinancing activities

as appropriate and separately disclosed.

Page 16: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Treatment of taxCash flow for tax payments / refund should

be classified as cash flow from operating activities.

If cash flow can be specifically identified as cash flow from investment / financing activities, appropriate classification should be made.

Page 17: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Investments in subsidiaries, associates and  joint ventures

Only the cash flow between itself and the investee is required to be reported

Example:Cash flow relating to dividends and advances

Page 18: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Acquisitions and disposals of subsidiaries  and other business

units Cash flow on acquisition and disposal of subsudiaries and other business units should be :

Presented separately

Classified as investing activities

Total purchase and disposal should be disclosed separately

The position of the purchase / disposal consideration discharged by means of cash and cash equivalents should be disclosed

Page 19: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Non-Cash TransactionsThese should be excluded from the cash flow statement

These transactions should be disclosed in the financial statements.

Examples

Acquisition of an enterprise by means of issue of equity sshares

Conversion of debt to equity

Page 20: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Format of Cash Flow Statement

(Indirect Method)

ABC Limited For the year ended…………..

(A) Cash Flows from Operating Activities: Net Profit before tax & extraordinary itemsAdjustment 1:

Depreciation & Amortization xxxProvision for Doubtful Debts xxxForeign Exchange gain/loss xxxDividend xxxInterest xxxGain/ Loss on sale of fixed assets/investmentsxxx xxx

Rs.

Rs.

Page 21: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Continued….Operating Profit before Working Cap. Changes

xxxAdjustment 2 for changes in working capital:

Bills Receivables xxxDebtors xxxInventories xxxPrepaid Expenses xxxBills Payable xxxCreditors xxx xxx

Cash Generated from Operations xxxIncome tax paid xxxCash before Extraordinary Items xxx

Rs.

Rs.

Page 22: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Continued….

Extraordinary Items xxxNet Cash from (used in) Operating Activities

xxx

(B) Cash Flow from Investing Activities: Purchase of Fixed Assets xxxProceeds from Sale of fixed assets xxxPurchase of Investments xxxProceeds from Sale of investments xxxInterests received xxxDividend received xxx

Net Cash from (used in) Investing Activitiesxxx

Rs.

Rs.

Page 23: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Continued….(C) Cash Flow from Financing Activities:

Proceeds from Issue of Shares/ Debentures xxxProceeds from Long-term debts xxxRepayment of Long-term Debts xxxRedemption of Debentures xxxRedemption of Preference Shares xxxDividend paid xxxInterest paid xxx

Net Cash from (used in) Financing Activitiesxxx

Net increase/decrease in cash and Cash Equivalents (A+B+C)xxx

Cash and Cash Equivalents at the beginning of the yearxxx

Cash and Cash Equivalents at the end of the yearxxx

Rs.

Rs.

Page 24: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Illustration 1. From the following information, prepare the Cash Flow Statement for the year ended March 31, 2014:

Particulars Rs.Opening Cash Balance 10,000Closing Cash Balance 12,000Decrease in Debtors 5,000Increase in Creditors 7,000Sale of Fixed Assets 20,000Redemption of Debentures 50,000Net Profit for the year 20,000

Page 25: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Solution :Cash Flow Statementfor the year ended 31st March, 2007

Particulars Rs.A. Cash Flow from Operating Activities 20,000

Net Profit for the year before taxAdd : Increase in Creditors 7,000

Decrease in Debtors 5,000 12,000 Net Cash provided by Operating Activities 32,000B. Cash Flow from Investing Activities 20,000

Proceeds from Sale of Fixed Assets 20,000Net Cash from Investing Activities

C. Cash Flow from Financing ActivitiesRedemption of Debentures (50,000)Net Cash used in Financing Activities (50000)

D. Net Increase in Cash (A +B+C) 2,000

Add : Cash at the beginning of the period 10,000

Cash at the end of the period 12,000  

Page 26: Accounting Standard-3 Cash Flow Statement by Nithin Raj

Illustration 2. From the following particulars , prepare the Cash Flow Statement for the year ended 31st March, 2007 by the Direct Method : (i) Cash sales Rs. 65,86,000.(ii) Cash collected from debtors during the year amounted to Rs. 33,23,400.(iii) Cash paid to suppliers was Rs. 79,36,810.(iv) Rs.9, 87, 500 was paid to and for employees.(v) Furniture of the book value of Rs. 18,500 was sold for Rs. 11,000 and a new furniture costing Rs. 83,160 was purchased.(vi) Debentures of the face value of Rs. 3,00,000 were redeemed at a premium of 2 per cent interest on debentures. Interest on debentures, Rs. 84,000 was also paid.

a. Dividend, Rs. 4,50,000 for the year ended 31st March, 2007 was distributed in May, 2007.b. Cash in hand and at bank as on March 31, 2006 and March 31,2007 was Rs. 51,070 and Rs. 5,74,000 respectively.

Page 27: Accounting Standard-3 Cash Flow Statement by Nithin Raj