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Cash Flow Statement

• 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 and Cash Equivalents

1. Cash equivalents are held for the purpose of meeting short-term cash commitments
rather than for investment or other purposes. For an investment to qualify as a cash
equivalent, it must be readily convertible to a known amount of cash and be subject to
an insignificant risk of changes in value.
2. Therefore, an investment normally qualifies as a cash equivalent 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).
3. 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.

• Reporting Cash Flows from Investing and Financing Activities

An enterprise should report separately major classes of gross cash receipts and gross cash
payments arising from investing and financing activities, except to the extent that cash flows
described in paragraphs 22 and 24 are reported on a net basis.

• Reporting Cash Flows on a Net Basis

Cash flows arising from the following operating, investing or financing activities may
be reported on a net basis:
(a) cash receipts and payments on behalf of customers when the cash flows reflect the
activities of the customer rather than those of the enterprise; and
(b) cash receipts and payments for items in which the turnover is quick, the amounts
are large, and the maturities are short.

Examples of cash receipts and payments referred to in paragraph 22(a) are:

(a) the acceptance and repayment of demand deposits by a bank;
(b) funds held for customers by an investment enterprise; and
(c) rents collected on behalf of, and paid over to, the owners of properties.

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Examples of cash receipts and payments referred to in paragraph 22(b) are advances made
for, and the repayments of:
(a) principal amounts relating to credit card customers;
(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.

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

1. 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. 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.
2. 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.
3. 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 financing
activities and includes the differences, if any, had those cash flows been reported at the
end-of-period exchange rates.

• Extraordinary Items
1. The cash flows associated with extraordinary items should be classified as arising from
operating, investing or financing activities as appropriate and separately disclosed.
2. The cash flows associated with extraordinary items are disclosed separately as arising
from operating, investing or financing activities in the cash flow statement, to enable
users to understand their nature and effect on the present and future cash flows of the
enterprise. These disclosures are in addition to the separate disclosures of the nature
and amount of extraordinary items required by Accounting Standard (AS) 5, Net Profit
or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

• Investments in Subsidiaries, Associates and Joint Ventures

When accounting for an investment in an associate or a subsidiary or a joint venture, an
investor restricts its reporting in the cash flow statement to the cash flows between itself and
the investee/joint venture, for example, cash flows relating to dividends and advances.

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• Acquisitions and Disposals of Subsidiaries and Other Business Units

1. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries
or other business units should be presented separately and classified as investing
activities.
2. An enterprise should disclose, in aggregate, in respect of both acquisition and disposal
of subsidiaries or other business units during the period each of the following:
(a) the total purchase or disposal consideration; and
(b) the portion of the purchase or disposal consideration discharged by means of
cash and cash equivalents.

3. The separate presentation of the cash flow effects of acquisitions 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.

• Components of Cash and Cash Equivalents

1. 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.
2. 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.
3. 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
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.

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 cash
equivalent balances held by a branch of the enterprise that operates in a country where
exchange controls or other legal restrictions apply as a result of which the balances are
not available for use by the enterprise.

Additional information may be relevant to users in understanding the financial position

and liquidity of an enterprise. Disclosure of this information, together with a
commentary by management, is encouraged and may include:
(a) the amount of undrawn borrowing facilities that may be available for future
operating activities and to settle capital commitments, indicating any restrictions on
the use of these facilities; and
(b) the aggregate amount of cash flows that represent increases in operating capacity
separately from those cash flows that are required to maintain operating capacity.

The separate disclosure of cash flows that represent increases in operating capacity and cash
flows that are required to maintain operating capacity is useful in enabling the user to
determine whether the enterprise is investing adequately in the maintenance of its operating
capacity. An enterprise that does not invest adequately in the maintenance of its operating
capacity may be prejudicing future profitability for the sake of current liquidity and
distributions to owners.

"Start where you are. Use what you have. Do what you can." Arthur Ashe

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