CASH FLOW STATEMENT AS PER AS-3 - NOTES

Cash Flow Statement As Per AS-3

            The Institute of Chartered Accountants of India has issued in 1997 the Accounting Standard AS-3 (revised) relating to cash flow analysis which has superseded AS-3 issued earlier. As per recent proposed format issued by the SEBI (Securities Exchange Board of India) it is mandatory for each company to give a copy of its cash flow analysis along with a copy of its final accounts.

The cash flow analysis can be classified into following activities:

1. Operating activities,
2. Investing activities, and
3. Financing activities.

            An enterprise presents its cash from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activities provides information that allows users to assess the impact of those activities on the financial position of the enterprise and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationship among those activities.

            A single transaction may include cash flows that are classified differently. For example, when the installment paid in respect of a fixed asset, acquired on deferred payment basis includes both interest and loan, the interest element is classified under financing activities and the loan element is classified under investing activities.

Operating Activities

            The amount of cash flows arising from operating activities is a jccyJ4jcator 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.

            Information about the specific components of historical operating cash flows is useful, in conjunction with other information in forecasting future operating cash flows. Cash flows from operating activities are primarily derived from principal revenue producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss.

Examples of Cash Flows Arising from Operating Activities

1. Cash receipts from the sale of goods and the rendering of services;
2. Cash receipts from royalties, fees, commissions and other revenue;
3. Cash payments to suppliers for goods and services;
4. Cash payments to and on behalf of employees;
5. Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits;
6. Cash payments of refunds of income taxes unless they can be specifically identified with financing and investing activities; and
7. Cash receipts and payments relating to future contracts, forward contracts, and swap contracts and swap contracts when the contracts are held for dealing on trading purpose.

            Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.

            An enterprise may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or selling securities are classified as operating activities. Similarly, cash advances and loans made by financial enterprises are usually classified as operating activities since they relate to the main revenue producing activity of that enterprise.