Accounting Standard -3 (ICAI) Cash Flow Statement

1. 1
Accounting Standard (AS) 3*
Accounting Standard-3 (AS-3),issuedby The Institute of CharteredAccountants of India (ICAI) in
June 1981, whichdealtwitha statementshowing‘ChangesinFinancialPosition’,(FundFlow
Statement),hasbeenrevisedandnowdealswiththe preparationandpresentationof Cashflow
statement.The revisedAS-3hasmade itmandatoryfor all listedcompaniestoprepare andpresent
a cash flowstatementalongwithotherfinancial statementsonannual basis.Hence,itmaybe
noted,thatFundFlowstatementisnomore consideredrelevantinaccountingandsonot discussed
here.
A cash flowstatement providesinformationaboutthe historical changesincashandcash
equivalentsof anenterprise byclassifyingcashflowsintooperating,investingandfinancing
activities.Itrequiresthatanenterprise shouldprepare acash flow statementandshouldpresentit
for eachaccountingperiodforwhichfinancial statementsare presented.Thischapterdiscussesthis
technique andexplainsthe methodof preparingacash flow statementforanaccountingperiod.
Objective
Informationaboutthe cashflowsof an enterprise isuseful inprovidingusersof financial statements
witha basisto assessthe abilityof the enterprisetogenerate cashandcash equivalentsandthe
needsof the enterprise toutilise those cashflows.The economicdecisionsthatare takenby users
require anevaluationof the abilityof anenterprise togenerate cashandcash equivalentsandthe
timingandcertaintyof theirgeneration.The Standarddealswiththe provisionof informationabout
the historical changesincashand cash equivalentsof anenterprise bymeansof acash flow
statementwhichclassifiescashflowsduringthe periodfromoperating,investingandfinancing
activities.
Cash and Cash Equivalents
Cash andCash EquivalentsAsstatedearlier,cashflow statementshowsinflowsand outflowsof cash
and cash equivalentsfromvariousactivitiesof anenterprise duringaparticularperiod.AsperAS-3,
‘Cash’ comprisescashinhandand demanddepositswithbanks,and ‘Cashequivalents’ means
short-termhighlyliquidinvestmentsthatare readilyconvertibleintoknownamountsof cashand
whichare subjecttoan insignificantriskof changesinvalue.Aninvestmentnormallyqualifiesas
cash equivalentsonlywhenithasa short maturity,of say,three monthsor lessfromthe date of
acquisition.Investmentsinsharesare excludedfromcashequivalentsunlesstheyare insubstantial
cash equivalents.
Classificationof Activities for the Preparationof CashFlow Statement
Variousactivitiesof anenterprise resultintocashflows(inflows orreceiptsandoutflowsor
payments) whichisthe subjectmatterof a cash flow statement.AsperAS-3,these activitiesare to
be classifiedintothree categories: (1) operating,(2) investing,and(3) financingactivities so as to
showseparatelythe cashflowsgenerated(orused) by(in) these activities.Thishelpsthe usersof
cash flowstatementtoassessthe impactof these activitiesonthe financial positionof anenterprise
and alsoon itscash and cash equivalents.

2. 2
1). Cash from Operating Activities
Operatingactivitiesare the activitiesthatconstitute the primaryormainactivitiesof anenterprise.
For example,foracompanymanufacturinggarments,operatingactivitiesare procurementof raw
material,incurrence of manufacturingexpenses, sale of garments,etc.
Cash Inflowsfrom operating activities
a. Cash receiptsfromsale of goodsandthe renderingof services.
b. Cash receiptsfromroyalties,fees,commissionsandotherrevenues.
Cash Outflowsfrom operatingactivities
a. Cash paymentstosuppliersforgoodsandservices.
b. Cash paymentstoandon behalf of the employees.
c. Cash paymentstoan insurance enterprise forpremiumsandclaims,annuities,andother
policybenefits.
d. Cashpaymentsof income taxesunlesstheycanbe specifically identifiedwithfinancing
and investingactivities.The netpositionisshownincase of operatingcashflows.
2). Cash from Investing Activities
As perAS-3,investingactivitiesare the acquisitionanddisposalof long-termassetsand
otherinvestmentsnotincludedincashequivalents.Investingactivitiesrelate topurchase andsale of
long-termassetsorfixedassetssuchasmachinery,furniture,landandbuilding,etc.Transactions
relatedtolong-terminvestmentare alsoinvestingactivities.
Cash Outflowsfrom investingactivities
a. Cash paymentstoacquire fixedassetsincludingintangiblesandcapitalisedresearchand
development.
b. Cash paymentstoacquire shares,warrantsor debtinstrumentsof otherenterprises
otherthan the instrumentsthose heldfortradingpurposes.
C. Cashadvancesand loansmade to thirdparty (otherthanadvancesandloansmade by a
financial enterprisewhereinitisoperatingactivities).
Cash Inflowsfrom InvestingActivities
a. Cash receiptfromdisposal of fixedassetsincludingintangibles.
b. Cashreceiptfromthe repaymentof advancesorloansmade to thirdparties(exceptin
case of financial enterprise).
c. Cash receiptfromdisposal of shares,warrantsordebtinstrumentsof otherenterprises
exceptthose heldfortradingpurposes.
d. Interestreceivedincashfromloansandadvances.
e.Dividendreceivedfrominvestmentsinotherenterprises.

3. 3
3). Cash from Financing Activities
As the name suggests,financingactivitiesrelate tolong-termfundsorcapital of an enterprise,e.g.,
cash proceedsfromissue of equityshares,debentures,raisinglong-termbankloans,repaymentof
bankloan,etc. Asper AS-3,financingactivitiesare activitiesthatresultinchangesinthe size and
compositionof the owners’capital (includingpreference share capital incase of a company) and
borrowingsof the enterprise.Separate disclosure of cashflowsarisingfromfinancingactivitiesis
importantbecause itisuseful inpredictingclaimsonfuture cashflowsbyprovidersof funds( both
capital and borrowings) tothe enterprise.Examplesof financingactivitiesare
Cash Inflowsfrom financingactivities
a. Cash proceedsfromissuingshares(equityor/andpreference).
b. Cash proceedsfromissuingdebentures,loans,bondsandothershort/long-term
borrowings.
Cash Outflowsfrom financingactivities
a. Cash repaymentsof amountsborrowed.
b. Interestpaidondebenturesandlong-termloansandadvances.
c. Dividendspaidonequityandpreference capital.