TMI BlogCash Flow StatementsX X X X Extracts X X X X X X X X Extracts X X X X ..... and the timing and certainty of their generation. 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. Scope 1. An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. 2. Users of an enterprise s financial statements are interested in how the enterprise generates and uses cash and cash equivalents. This is the case regardless of the nature of the enterprise s activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial enterprise. Enterprises 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. Benefits of Cash Flow Information 3. A cash flow statement, when used in conjunction with the other financial statements, provides information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valent only when it has a short maturity of, say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents unless they are, in substance, cash equivalents; for example, preference shares of a company acquired shortly before their specified redemption date (provided there is only an insignificant risk of failure of the company to repay the amount at maturity). 7. Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents. Presentation of a Cash Flow Statement 8. The cash flow statement should report cash flows during the period classified by operating, investing and financing activities. 9. An enterprise presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading 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. Investing Activities 15. 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. Examples of cash flows arising from investing activities are: (a) cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalized research and development costs and self-constructed fixed assets; (b) cash receipts from disposal of fixed assets (including intangibles) ; (c) cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is not available under the indirect method and is, therefore, considered more appropriate than the indirect method. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either: (a) from the accounting records of the enterprise; or (b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) and other items in the statement of profit and loss for: i) changes during the period in inventories and operating receivables and payables; ii) other non-cash items; and iii) other items for which the cash effects are investing or financing cash flows. 20. Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of: (a) changes during the period in inventories and operating receivables and payables; (b) non-cash items such as depreciation, provisions, deferred taxes, and unrealised foreign exchange gains and losses; and (c) all other items for which the cash effects are investing or financing cash flows. Alternatively, the net cash flow from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of the cash flow. A rate that approximates the actual rate may be used if the result is substantially the same as would arise if the rates at the dates of the cash flows were used. The effect of changes in exchange rates on cash and cash equivalents held in a foreign currency should be reported as a separate part of the reconciliation of the changes in cash and cash equivalents during the period. 26. Cash flows denominated in foreign currency are reported in a manner consistent with Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates. This permits the use of an exchange rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used for recording foreign currency transactions. 27. Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgue that dividends paid may be classified as a component of cash flows from operating activities in order to assist users to determine the ability of an enterprise to pay dividends out of operating cash flows. However, it is considered more appropriate that dividends paid should be classified as cash flows from financing activities because they are cost of obtaining financial resources. Taxes on Income 34. Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. 35. Taxes on income arise on transactions that give rise to cash flows that are classified as operating, investing or financing activities in a cash flow statement. While tax expense may be readily identifiable with investing or financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period from the cash flows of the underlying transactions. Therefore, taxes paid are usually classified as cash flows from operating activities. However, when it is practicable to identify the tax cash flow with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bilities; (b) the acquisition of an enterprise by means of issue of shares; and (c) the conversion of debt to equity. Components of Cash and Cash Equivalents 42. 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. 43. In view of the variety of cash management practices, an enterprise discloses the policy which it adopts in determining the composition of cash and cash equivalents. 44. The effect of any change in the policy for determining components of cash and cash equivalents is reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. Other Disclosures 45. An enterprise should disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by it. 46. There are various circumstances in which cash and cash equivalent balances held by an enterprise are not available for use by it. Examples include cash and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cash flows (figures are in Rs. 000). (a) An amount of 250 was raised from the issue of share capital and a further 250 was raised from long term borrowings. (b) Interest expense was 400 of which 170 was paid during the period. 100 relating to interest expense of the prior period was also paid during the period. (c) Dividends paid were 1,200. (d) Tax deducted at source on dividends received (included in the tax expense of 300 for the year) amounted to 40. (e) During the period, the enterprise acquired fixed assets for 350. The payment was made in cash. (f) Plant with original cost of 80 and accumulated depreciation of 60 was sold for 20. (g) Foreign exchange loss of 40 represents the reduction in the carrying amount of a short-term investment in foreign-currency designated bonds arising out of a change in exchange rate between the date of acquisition of the investment and the balance sheet date. (h) Sundry debtors and sundry creditors include amounts relating to credit sales and credit purchases only. Balance Sheet as at 31.12.1996 1996 (Rs. 000) Assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Extraordinary item Insurance proceeds from earthquake disaster settlement 180 Net profit after extraordinary item 3,530 Income-tax (300) Net profit 3,230 Direct Method Cash Flow Statement [Paragraph 18(a)] (Rs. 000) 1996 Cash flows from operating activities Cash receipts from customers 30,150 Cash paid to suppliers and employees (27,600) Cash generated from operations 2,550 Income taxes paid (860) Cash flow before extraordinary item 1,690 Proceeds from earthquake disaster settlement 180 Net cash from operating activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebtors (500) Decrease in inventories 1,050 Decrease in sundry creditors (1,740) Cash generated from operations 2,550 Income taxes paid (860) Cash flow before extraordinary item 1,690 Proceeds from earthquake disaster settlement 180 Net cash from operating activities 1,870 Cash flows from investing activities Purchase of fixed assets (350) Proceeds from sale of equipment 20 Interest received 200 Dividends received 160 Net cash from investing activities 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before working capital changes is sometimes presented as follows: Revenues excluding investment income 30,650 Operating expense excluding depreciation (26,910) Operating profit before working capital changes 3,740 Working Notes The working notes given below do not form part of the cash flow statement and, accordingly, need not be published. The purpose of these working notes is merely to assist in understanding the manner in which various figures in the cash flow statement have been derived. (Figures are in Rs. 000.) 1. Cash receipts from customers Sales 30,650 Add: Sundry debtors at the beginning of the year 1,200 31,850 Less : Sundry debtors at the end of the year 1,700 30,150 2. Cash paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II Cash Flow Statement for a Financial Enterprise This illustration does not form part of the accounting standard. Its purpose is to illustrate the application of the accounting standard. 1. The illustration shows only current period amounts. 2. The illustration is presented using the direct method Cash flows from operating activities (Rs. 000) 1996 Interest and commission receipts 28,447 Interest payments (23,463) Recoveries on loans previously written off 237 Cash payments to employees and suppliers (997) Operating profit before changes in operating assets 4,224 (Increase) decrease in operating assets: (650) Short-term funds Deposits held for regulatory or monetary control purposes 234 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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