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Cash Flow Statements
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....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 that enables users to evaluate the changes in net assets of an enterprise, its fi....
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....ts 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 enterprise and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationsh....
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....4. 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 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 capitalised 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, warran....
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....re disclosed; or (b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. 19. The direct method provides information which may be useful in estimating future cash flows and which 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 n....
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....stomers; (b) the purchase and sale of investments; and (c) other short-term borrowings, for example, those which have a maturity period of three months or less. 24. Cash flows arising from each of the following activities of a financial enterprise may be reported on a net basis: (a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date; (b) the placement of deposits with and withdrawal of deposits from other financial enterprises; and (c) cash advances and loans made to customers and the repayment of those advances and loans. >Foreign Currency Cash Flows 25. Cash flows arising from transactions in a foreign currency should be recorded in an enterprise's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at 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.....
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....ties. Dividends paid should be classified as cash flows from financing activities. 31. The total amount of interest paid during the period is disclosed in the cash flow statement whether it has been recognised as an expense in the statement of profit and loss or capitalised in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets. 32. Interest paid and interest and dividends received are usually classified as operating cash flows for a financial enterprise. However, there is no consensus on the classification of these cash flows for other enterprises. Some argue that interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of net profit or loss. However, it is more appropriate that interest paid and interest and dividends received are classified as financing cash flows and investing cash flows respectively, because they are cost of obtaining financial resources or returns on investments. 33. Some argue 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 ou....
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....itions and disposals of subsidiaries and other business units as single line items helps to distinguish those cash flows from other cash flows. The cash flow effects of disposals are not deducted from those of acquisitions. >Non-cash Transactions 40. Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities. 41. Many investing and financing activities do not have a direct impact on current cash flows although they do affect the capital and asset structure of an enterprise. The exclusion of non-cash transactions from the cash flow statement is consistent with the objective of a cash flow statement as these items do not involve cash flows in the current period. Examples of non-cash transactions are: (a) the acquisition of assets by assuming directly related liabilities; (b) the acquisition of an enterprise by means of issue of shares; and (....
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....g future profitability for the sake of current liquidity and distributions to owners. >Illustration I Cash Flow Statement for an Enterprise other than 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 example shows only current period amounts. 2. Information from the statement of profit and loss and balance sheet is provided to show how the statements of cash flows under the direct method and the indirect method have been derived. Neither the statement of profit and loss nor the balance sheet is presented in conformity with the disclosure and presentation requirements of applicable laws and accounting standards. The working notes given towards the end of this illustration are intended to assist in understanding the manner in which the various figures appearing in the cash flow statement have been derived. These working notes do not form part of the cash flow statement and, accordingly, need not be published. 3. The following additional information is also relevant for the preparation of the statement of cash flows (figures are in Rs.'000). &....
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.... 2,630 Total liabilities and shareholders' funds 6,800 6,660 Statement of Profit and Loss for the period ended 31.12.1996 (Rs. '000) Sales 30,650 Cost of sales (26,000) Gross profit 4,650 Depreciation (450) Administrative and selling expenses (910) Interest expense (400) Interest income 300 Dividend income 200 Foreign exchange loss (40) Net profit before taxation and extraordinary item 3,350 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 1,870....
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....ctivities (1,150) Net increase in cash and cash equivalents 750 Cash and cash equivalents at beginning of period (see Note 1) 160 Cash and cash equivalents at end of period (see Note 1) 910 Notes to the cash flow statement (direct method and indirect method) 1. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and balances with banks and investments in money-market instruments. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts. 1996 1995 Cash on hand and balances with banks 200 25 Short-term investments 670 135 Cash and cash equivalents 870 160 Effect of exchange rate changes 40 - Cash and cash equivalents as restated 910 160 Cash and cash equivalents at the end of the period include deposits with banks of 100 held by a branch which are not freely remissible to the company because of currency exchange restrictions. The company has undrawn borrowing facilities of 2,000 of which 700 may be used only for future expansion. 2. Total tax paid during the ....
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.... Add: Interest payable at the beginning of the year 100 500 Less: Interest payable at the end of the year 230 270 Illustration II Cash Flow Statement for a Financial Enterprise The Illustration does not form part of the accounting standard. Its purpose is to illustrate the application of the accounting standard. 1. The example shows only current period amounts. 2. The example is presented using the direct method. (Rs. '000) 1996 Cash flows from operating activities 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: Short-term funds (650) Deposits held for regulatory or monetary control purposes 234 Funds advanced to customers (288) Net increase in credit card receivables (360) Other short-term securities (120) Increase (decrease)....