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Accounting Standard
History
Introduction
Purpose
Applicability
Users of cash flow statements
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
Disclosures of cash and cash equivalents
Format of cash flow statement
Accounting is the art of recording transactions in the best manner
possible, so as to enable the reader to arrive at judgments/come to
conclusions, and in this regard it is utmost necessary that there are
set guidelines. These guidelines are generally called accounting
policies. The intricacies of accounting policies permitted
Companies to alter their accounting principles for their benefit.
This made it impossible to make comparisons. In order to avoid
the above and to have a harmonised accounting principle,
Standards needed to be set by recognised accounting bodies. This
paved the way for Accounting Standards to come into existence.
Accounting Standards in India are issued By the Institute of
Chartered Accountants of India (ICAI). At present there are 30
Accounting Standards issued by ICAI.
Cash basis financial statements were very common before
accrual basis financial statements. The "flow of funds"
statements of the past were cash flow statements.
In 1863, the Dowlais Iron Company had recovered from a
business slump, but had no cash to invest for a new blast
furnace, despite having made a profit. To explain why
there were no funds to invest, the manager made a new
financial statement that was called a comparison balance
sheet, which showed that the company was holding too
much inventory. This new financial statement was the
genesis of Cash Flow Statement that is used today
Cash 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.
The balance sheet is a snapshot of a firm's financial
resources and obligations at a single point in time, and
the income statement summarizes a firm's financial
transactions over an interval of time. These two
financial statements reflect the accrual basis accounting
used by firms to match revenues with the expenses
associated with generating those revenues. The cash
flow statement includes only inflows and outflows of
cash and cash equivalents; it excludes transactions that
do not directly affect cash receipts and payments. These
noncash transactions include depreciation or write-offs
on bad debts or credit losses to name a few.
This standard applies to the enterprises:
Listed companies;
▪ Cash flow statement of listed companies shall be
presented only under the indirect method as prescribed
in AS 3
Accounting personnel, who need to know whether the
organization will be able to cover payroll and other
immediate expenses
Potential lenders or creditors, who want a clear picture
of a company's ability to repay
Potential investors, who need to judge whether the
company is financially sound
Potential employees or contractors, who need to know
whether the company will be able to afford
compensation
Shareholders of the business.
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.
Cash Equivalents
Held for meeting short term commitments
It is readily convertible into known amounts of cash
It has a very insignificant risk
Short maturity (say 3 months maximum)
Sale of share
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.
Interest Received
Received from investment – it is in investment 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.
Dividend Received
For financial enterprises – in operating activities
Dividend Paid
Always classified as financing activities
Example:
Cash flow relating to dividends and advances
Cash flow on acquisition and disposal of subsudiaries and
other business units should be :
Presented separately