ACCOUNTING STANDARDS

Indian Accounting Standard 7 (Revised 2016) – Cash

Flow Statement

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

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.

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.

IND AS 7 (REVISED 2016)

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.

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.

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

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.

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.

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;

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.

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.

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.

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.

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.

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

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.

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

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.

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

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.

SAMPLE OF CFS UNDER DIRECT METHOD

SAMPLE OF CFS UNDER INDIRECT METHOD

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.

TREATMENT OF INTEREST AND DIVIDEND

Enterprise Interest Paid Interest

Received

Dividend

Paid

Dividend

Received

FinancialOperating

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.

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.

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

REFERENCES / SOURCES

1. Information

www.caclub.com

www.icai.org

www.mca.gov.in

www.nos.org/downloads

2. Images

Google Images

www.accountingcourse.com