ICAI Notes- Unit 2: Presentation & Disclosures Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 
4.16 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 3                               
CASH FLOW STATEMENT 
 
 
After studying this unit, you will be able to comprehend – 
? What are Cash and Cash Equivalents  
? Presentation of a Cash Flow Statement  
? Reporting Cash Flows from Operating Activities  
? Reporting Cash Flows from Investing and Financing Activities  
? Reporting Cash Flows on a Net Basis  
? Foreign Currency Cash Flows  
? Extraordinary Items  
? Interest and Dividends  
? Taxes on Income  
? Non-Cash Transactions. 
 2.1 INTRODUCTION 
This Standard is mandatory for Non-SMCs (Non Small & Medium Companies) and 
the enterprises which fall in the category of Level I (for non-corporate entities), at 
the end of the relevant accounting period. For all other enterprises though it is not 
compulsory but it is encouraged to prepare such statements.  
However, the Companies Act, 2013, mandates preparation of Cash flow statement 
by all companies except one person company, small company and dormant 
company (refer note below).  
Where an enterprise was not covered by this statement during the previous year 
but qualifies in the current accounting year, they are not supposed to disclose the 
© The Institute of Chartered Accountants of India
Page 2


 
 
 
4.16 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 3                               
CASH FLOW STATEMENT 
 
 
After studying this unit, you will be able to comprehend – 
? What are Cash and Cash Equivalents  
? Presentation of a Cash Flow Statement  
? Reporting Cash Flows from Operating Activities  
? Reporting Cash Flows from Investing and Financing Activities  
? Reporting Cash Flows on a Net Basis  
? Foreign Currency Cash Flows  
? Extraordinary Items  
? Interest and Dividends  
? Taxes on Income  
? Non-Cash Transactions. 
 2.1 INTRODUCTION 
This Standard is mandatory for Non-SMCs (Non Small & Medium Companies) and 
the enterprises which fall in the category of Level I (for non-corporate entities), at 
the end of the relevant accounting period. For all other enterprises though it is not 
compulsory but it is encouraged to prepare such statements.  
However, the Companies Act, 2013, mandates preparation of Cash flow statement 
by all companies except one person company, small company and dormant 
company (refer note below).  
Where an enterprise was not covered by this statement during the previous year 
but qualifies in the current accounting year, they are not supposed to disclose the 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.17 
 
figures for the corresponding previous years. Whereas, if an enterprises qualifies 
under this statement to prepare the cash flow statements during the previous year 
but now disqualified, will continue to prepare cash flow statements for another two 
consecutive years. 
Note : Under Section 129 of the Companies Act, 2013, the financial statement, with 
respect to One Person Company, small company and dormant company, may not 
include the cash flow statement. As per the Amendment, under Chapter I, clause 
(40) of section 2, an exemption has been provided vide Notification dated 13th 
June, 2017 under Section 462 of the Companies Act 2013 to a startup private 
company besides one person company, small company and dormant company. As 
per the amendment, a startup private company is not required to include the cash 
flow statement in the financial statements. 
Thus the financial statements, with respect to one person company, small company, 
dormant company and private company (if such a private company is a start-up), 
may not include the cash flow statement. 
 2.2 OBJECTIVE 
Cash flow Statement (CFS) is an additional information provided to the users of 
accounts in the form of an statement, which reflects the various sources from where 
cash was generated (inflow of cash) by an enterprise during the relevant accounting 
year and how these inflows were utilised (outflow of cash) by the enterprise. This 
helps the users of accounts: 
? To identify the historical changes in the flow of cash & cash equivalents. 
? To determine the future requirement of cash & cash equivalents. 
? To assess the ability to generate cash & cash equivalents. 
? To estimate the further requirement of generating cash & cash equivalents. 
? To compare the operational efficiency of different enterprises. 
? To study the insolvency and liquidity position of an enterprise. 
? As an indicator of amount, timing and certainty of future cash flows. 
? To check the accuracy of past assessments of future cash flows 
? In examining the relationship between profitability and net cash flow and the 
impact of changing prices. 
© The Institute of Chartered Accountants of India
Page 3


 
 
 
4.16 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 3                               
CASH FLOW STATEMENT 
 
 
After studying this unit, you will be able to comprehend – 
? What are Cash and Cash Equivalents  
? Presentation of a Cash Flow Statement  
? Reporting Cash Flows from Operating Activities  
? Reporting Cash Flows from Investing and Financing Activities  
? Reporting Cash Flows on a Net Basis  
? Foreign Currency Cash Flows  
? Extraordinary Items  
? Interest and Dividends  
? Taxes on Income  
? Non-Cash Transactions. 
 2.1 INTRODUCTION 
This Standard is mandatory for Non-SMCs (Non Small & Medium Companies) and 
the enterprises which fall in the category of Level I (for non-corporate entities), at 
the end of the relevant accounting period. For all other enterprises though it is not 
compulsory but it is encouraged to prepare such statements.  
However, the Companies Act, 2013, mandates preparation of Cash flow statement 
by all companies except one person company, small company and dormant 
company (refer note below).  
Where an enterprise was not covered by this statement during the previous year 
but qualifies in the current accounting year, they are not supposed to disclose the 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.17 
 
figures for the corresponding previous years. Whereas, if an enterprises qualifies 
under this statement to prepare the cash flow statements during the previous year 
but now disqualified, will continue to prepare cash flow statements for another two 
consecutive years. 
Note : Under Section 129 of the Companies Act, 2013, the financial statement, with 
respect to One Person Company, small company and dormant company, may not 
include the cash flow statement. As per the Amendment, under Chapter I, clause 
(40) of section 2, an exemption has been provided vide Notification dated 13th 
June, 2017 under Section 462 of the Companies Act 2013 to a startup private 
company besides one person company, small company and dormant company. As 
per the amendment, a startup private company is not required to include the cash 
flow statement in the financial statements. 
Thus the financial statements, with respect to one person company, small company, 
dormant company and private company (if such a private company is a start-up), 
may not include the cash flow statement. 
 2.2 OBJECTIVE 
Cash flow Statement (CFS) is an additional information provided to the users of 
accounts in the form of an statement, which reflects the various sources from where 
cash was generated (inflow of cash) by an enterprise during the relevant accounting 
year and how these inflows were utilised (outflow of cash) by the enterprise. This 
helps the users of accounts: 
? To identify the historical changes in the flow of cash & cash equivalents. 
? To determine the future requirement of cash & cash equivalents. 
? To assess the ability to generate cash & cash equivalents. 
? To estimate the further requirement of generating cash & cash equivalents. 
? To compare the operational efficiency of different enterprises. 
? To study the insolvency and liquidity position of an enterprise. 
? As an indicator of amount, timing and certainty of future cash flows. 
? To check the accuracy of past assessments of future cash flows 
? In examining the relationship between profitability and net cash flow and the 
impact of changing prices. 
© The Institute of Chartered Accountants of India
 
 
 
4.18 
ADVANCED ACCOUNTING 
 
 2.3 MEANING OF THE TERM CASH AND CASH 
EQUIVALENTS FOR CASH FLOW STATEMENTS 
Cash and cash equivalents for the purpose of cash flow statement consists of the 
following: 
(a) Cash in hand and deposits repayable on demand with any bank or other 
financial institutions and  
(b) Cash equivalents, which are short term, highly liquid investments that are 
readily convertible into known amounts of cash and are subject to 
insignificant risk of change in value. A short-term investment is one, which is 
due for maturity within three months from the date of acquisition. 
Investments in shares are not normally taken as cash equivalent, because of 
uncertainties associated with them as to realisable value. 
Note: For the purpose of cash flow statement, ‘cash and cash equivalent’ consists 
of at least three balance sheet items, viz. cash in hand; demand deposits with banks 
and investments regarded as cash equivalents. For this reason, the AS 3 requires 
enterprises to give a break-up of opening and closing cash shown in their cash flow 
statements. This is presented as a note to cash flow statement. 
 2.4 MEANING OF THE TERM CASH FLOW  
Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash 
equivalents. Any transaction, which does not result in cash flow, should not be 
reported in the cash flow statement. Movements within cash or cash equivalents 
are not cash flows because they do not change cash as defined by AS 3, which is 
sum of cash, bank and cash equivalents. For example, acquisitions of cash 
equivalent investments or cash deposited into bank are not cash flows.  
It is important to note that a change in cash does not necessarily imply cash flow. 
For example:  Suppose an enterprise has a bank balance of USD 10,000, stated in 
books at `4,90,000 using the rate of exchange `49/USD prevailing on date of receipt 
of dollars. If the closing rate of exchange is `50/USD, the bank balance will be 
restated at `5,00,000 on the balance sheet date. The increase is, however, not a cash 
flow because neither there is any cash inflow nor there is any cash outflow. 
© The Institute of Chartered Accountants of India
Page 4


 
 
 
4.16 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 3                               
CASH FLOW STATEMENT 
 
 
After studying this unit, you will be able to comprehend – 
? What are Cash and Cash Equivalents  
? Presentation of a Cash Flow Statement  
? Reporting Cash Flows from Operating Activities  
? Reporting Cash Flows from Investing and Financing Activities  
? Reporting Cash Flows on a Net Basis  
? Foreign Currency Cash Flows  
? Extraordinary Items  
? Interest and Dividends  
? Taxes on Income  
? Non-Cash Transactions. 
 2.1 INTRODUCTION 
This Standard is mandatory for Non-SMCs (Non Small & Medium Companies) and 
the enterprises which fall in the category of Level I (for non-corporate entities), at 
the end of the relevant accounting period. For all other enterprises though it is not 
compulsory but it is encouraged to prepare such statements.  
However, the Companies Act, 2013, mandates preparation of Cash flow statement 
by all companies except one person company, small company and dormant 
company (refer note below).  
Where an enterprise was not covered by this statement during the previous year 
but qualifies in the current accounting year, they are not supposed to disclose the 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.17 
 
figures for the corresponding previous years. Whereas, if an enterprises qualifies 
under this statement to prepare the cash flow statements during the previous year 
but now disqualified, will continue to prepare cash flow statements for another two 
consecutive years. 
Note : Under Section 129 of the Companies Act, 2013, the financial statement, with 
respect to One Person Company, small company and dormant company, may not 
include the cash flow statement. As per the Amendment, under Chapter I, clause 
(40) of section 2, an exemption has been provided vide Notification dated 13th 
June, 2017 under Section 462 of the Companies Act 2013 to a startup private 
company besides one person company, small company and dormant company. As 
per the amendment, a startup private company is not required to include the cash 
flow statement in the financial statements. 
Thus the financial statements, with respect to one person company, small company, 
dormant company and private company (if such a private company is a start-up), 
may not include the cash flow statement. 
 2.2 OBJECTIVE 
Cash flow Statement (CFS) is an additional information provided to the users of 
accounts in the form of an statement, which reflects the various sources from where 
cash was generated (inflow of cash) by an enterprise during the relevant accounting 
year and how these inflows were utilised (outflow of cash) by the enterprise. This 
helps the users of accounts: 
? To identify the historical changes in the flow of cash & cash equivalents. 
? To determine the future requirement of cash & cash equivalents. 
? To assess the ability to generate cash & cash equivalents. 
? To estimate the further requirement of generating cash & cash equivalents. 
? To compare the operational efficiency of different enterprises. 
? To study the insolvency and liquidity position of an enterprise. 
? As an indicator of amount, timing and certainty of future cash flows. 
? To check the accuracy of past assessments of future cash flows 
? In examining the relationship between profitability and net cash flow and the 
impact of changing prices. 
© The Institute of Chartered Accountants of India
 
 
 
4.18 
ADVANCED ACCOUNTING 
 
 2.3 MEANING OF THE TERM CASH AND CASH 
EQUIVALENTS FOR CASH FLOW STATEMENTS 
Cash and cash equivalents for the purpose of cash flow statement consists of the 
following: 
(a) Cash in hand and deposits repayable on demand with any bank or other 
financial institutions and  
(b) Cash equivalents, which are short term, highly liquid investments that are 
readily convertible into known amounts of cash and are subject to 
insignificant risk of change in value. A short-term investment is one, which is 
due for maturity within three months from the date of acquisition. 
Investments in shares are not normally taken as cash equivalent, because of 
uncertainties associated with them as to realisable value. 
Note: For the purpose of cash flow statement, ‘cash and cash equivalent’ consists 
of at least three balance sheet items, viz. cash in hand; demand deposits with banks 
and investments regarded as cash equivalents. For this reason, the AS 3 requires 
enterprises to give a break-up of opening and closing cash shown in their cash flow 
statements. This is presented as a note to cash flow statement. 
 2.4 MEANING OF THE TERM CASH FLOW  
Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash 
equivalents. Any transaction, which does not result in cash flow, should not be 
reported in the cash flow statement. Movements within cash or cash equivalents 
are not cash flows because they do not change cash as defined by AS 3, which is 
sum of cash, bank and cash equivalents. For example, acquisitions of cash 
equivalent investments or cash deposited into bank are not cash flows.  
It is important to note that a change in cash does not necessarily imply cash flow. 
For example:  Suppose an enterprise has a bank balance of USD 10,000, stated in 
books at `4,90,000 using the rate of exchange `49/USD prevailing on date of receipt 
of dollars. If the closing rate of exchange is `50/USD, the bank balance will be 
restated at `5,00,000 on the balance sheet date. The increase is, however, not a cash 
flow because neither there is any cash inflow nor there is any cash outflow. 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.19 
 
 2.5 TYPES OF CASH FLOW 
Cash flows for an enterprise occur in various ways, e.g. through operating income 
or expenses, by borrowing or repayment of borrowing or by acquisition or disposal 
of fixed assets. The implication of each type of cash flow is clearly different. Cash 
received on disposal of a useful fixed asset is likely to have adverse effect on future 
performance of the enterprise and it is completely different from cash received 
through operating income or cash received through borrowing. It may also be 
noted that implications of each cash flow types are interrelated. For example, 
borrowed cash used for meeting operating expenses is not same as borrowed cash 
used for acquisition of useful fixed assets. 
For the aforesaid reasons, the standard identifies three types of cash flows, i.e.  
i. operating cash flows; 
ii. investing cash flows; and  
iii. financing cash flows.  
Separate presentation of each type of cash flow in the cash flow statement 
improves usefulness of cash flow information.  
The operating cash flows are cash flows generated by operating activities or by 
other activities that are not investing or financing activities. Operating activities are 
the principal revenue-producing activities of the enterprise. Examples include, cash 
purchase and sale of goods, collections from customers for goods, payment to 
suppliers of goods, payment of salaries, wages etc. 
The investing cash flows are cash flows generated by investing activities. The 
investing activities are the acquisition and disposal of long-term assets and other 
investments not included in cash equivalents. The examples of investing cash flows 
include cash flow arising from investing activities include: (a) receipts from disposals 
of fixed assets; (b) loan given to / recovered from other entities (other than loans by 
financial enterprises) (c) payments to acquire fixed assets (d) Interests and dividends 
earned (other than interests and dividends earned by financial institutions). 
The financing cash flows are cash flows generated by financing activities. 
Financing activities are activities that result in changes in the size and composition 
of the owners’ capital (including preferences share capital in the case of company) 
© The Institute of Chartered Accountants of India
Page 5


 
 
 
4.16 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 3                               
CASH FLOW STATEMENT 
 
 
After studying this unit, you will be able to comprehend – 
? What are Cash and Cash Equivalents  
? Presentation of a Cash Flow Statement  
? Reporting Cash Flows from Operating Activities  
? Reporting Cash Flows from Investing and Financing Activities  
? Reporting Cash Flows on a Net Basis  
? Foreign Currency Cash Flows  
? Extraordinary Items  
? Interest and Dividends  
? Taxes on Income  
? Non-Cash Transactions. 
 2.1 INTRODUCTION 
This Standard is mandatory for Non-SMCs (Non Small & Medium Companies) and 
the enterprises which fall in the category of Level I (for non-corporate entities), at 
the end of the relevant accounting period. For all other enterprises though it is not 
compulsory but it is encouraged to prepare such statements.  
However, the Companies Act, 2013, mandates preparation of Cash flow statement 
by all companies except one person company, small company and dormant 
company (refer note below).  
Where an enterprise was not covered by this statement during the previous year 
but qualifies in the current accounting year, they are not supposed to disclose the 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.17 
 
figures for the corresponding previous years. Whereas, if an enterprises qualifies 
under this statement to prepare the cash flow statements during the previous year 
but now disqualified, will continue to prepare cash flow statements for another two 
consecutive years. 
Note : Under Section 129 of the Companies Act, 2013, the financial statement, with 
respect to One Person Company, small company and dormant company, may not 
include the cash flow statement. As per the Amendment, under Chapter I, clause 
(40) of section 2, an exemption has been provided vide Notification dated 13th 
June, 2017 under Section 462 of the Companies Act 2013 to a startup private 
company besides one person company, small company and dormant company. As 
per the amendment, a startup private company is not required to include the cash 
flow statement in the financial statements. 
Thus the financial statements, with respect to one person company, small company, 
dormant company and private company (if such a private company is a start-up), 
may not include the cash flow statement. 
 2.2 OBJECTIVE 
Cash flow Statement (CFS) is an additional information provided to the users of 
accounts in the form of an statement, which reflects the various sources from where 
cash was generated (inflow of cash) by an enterprise during the relevant accounting 
year and how these inflows were utilised (outflow of cash) by the enterprise. This 
helps the users of accounts: 
? To identify the historical changes in the flow of cash & cash equivalents. 
? To determine the future requirement of cash & cash equivalents. 
? To assess the ability to generate cash & cash equivalents. 
? To estimate the further requirement of generating cash & cash equivalents. 
? To compare the operational efficiency of different enterprises. 
? To study the insolvency and liquidity position of an enterprise. 
? As an indicator of amount, timing and certainty of future cash flows. 
? To check the accuracy of past assessments of future cash flows 
? In examining the relationship between profitability and net cash flow and the 
impact of changing prices. 
© The Institute of Chartered Accountants of India
 
 
 
4.18 
ADVANCED ACCOUNTING 
 
 2.3 MEANING OF THE TERM CASH AND CASH 
EQUIVALENTS FOR CASH FLOW STATEMENTS 
Cash and cash equivalents for the purpose of cash flow statement consists of the 
following: 
(a) Cash in hand and deposits repayable on demand with any bank or other 
financial institutions and  
(b) Cash equivalents, which are short term, highly liquid investments that are 
readily convertible into known amounts of cash and are subject to 
insignificant risk of change in value. A short-term investment is one, which is 
due for maturity within three months from the date of acquisition. 
Investments in shares are not normally taken as cash equivalent, because of 
uncertainties associated with them as to realisable value. 
Note: For the purpose of cash flow statement, ‘cash and cash equivalent’ consists 
of at least three balance sheet items, viz. cash in hand; demand deposits with banks 
and investments regarded as cash equivalents. For this reason, the AS 3 requires 
enterprises to give a break-up of opening and closing cash shown in their cash flow 
statements. This is presented as a note to cash flow statement. 
 2.4 MEANING OF THE TERM CASH FLOW  
Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash 
equivalents. Any transaction, which does not result in cash flow, should not be 
reported in the cash flow statement. Movements within cash or cash equivalents 
are not cash flows because they do not change cash as defined by AS 3, which is 
sum of cash, bank and cash equivalents. For example, acquisitions of cash 
equivalent investments or cash deposited into bank are not cash flows.  
It is important to note that a change in cash does not necessarily imply cash flow. 
For example:  Suppose an enterprise has a bank balance of USD 10,000, stated in 
books at `4,90,000 using the rate of exchange `49/USD prevailing on date of receipt 
of dollars. If the closing rate of exchange is `50/USD, the bank balance will be 
restated at `5,00,000 on the balance sheet date. The increase is, however, not a cash 
flow because neither there is any cash inflow nor there is any cash outflow. 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.19 
 
 2.5 TYPES OF CASH FLOW 
Cash flows for an enterprise occur in various ways, e.g. through operating income 
or expenses, by borrowing or repayment of borrowing or by acquisition or disposal 
of fixed assets. The implication of each type of cash flow is clearly different. Cash 
received on disposal of a useful fixed asset is likely to have adverse effect on future 
performance of the enterprise and it is completely different from cash received 
through operating income or cash received through borrowing. It may also be 
noted that implications of each cash flow types are interrelated. For example, 
borrowed cash used for meeting operating expenses is not same as borrowed cash 
used for acquisition of useful fixed assets. 
For the aforesaid reasons, the standard identifies three types of cash flows, i.e.  
i. operating cash flows; 
ii. investing cash flows; and  
iii. financing cash flows.  
Separate presentation of each type of cash flow in the cash flow statement 
improves usefulness of cash flow information.  
The operating cash flows are cash flows generated by operating activities or by 
other activities that are not investing or financing activities. Operating activities are 
the principal revenue-producing activities of the enterprise. Examples include, cash 
purchase and sale of goods, collections from customers for goods, payment to 
suppliers of goods, payment of salaries, wages etc. 
The investing cash flows are cash flows generated by investing activities. The 
investing activities are the acquisition and disposal of long-term assets and other 
investments not included in cash equivalents. The examples of investing cash flows 
include cash flow arising from investing activities include: (a) receipts from disposals 
of fixed assets; (b) loan given to / recovered from other entities (other than loans by 
financial enterprises) (c) payments to acquire fixed assets (d) Interests and dividends 
earned (other than interests and dividends earned by financial institutions). 
The financing cash flows are cash flows generated by financing activities. 
Financing activities are activities that result in changes in the size and composition 
of the owners’ capital (including preferences share capital in the case of company) 
© The Institute of Chartered Accountants of India
 
 
 
4.20 
ADVANCED ACCOUNTING 
 
and borrowings of the enterprise. Examples include issue of shares / debentures, 
redemption of debentures / preference shares, payment of dividends and payment 
of interests (other than interests paid by financial institutions). 
 2.6 IDENTIFYING TYPE OF CASH FLOWS 
Classification of Cash Flows 
 
Cash flow type depends on the business of the enterprise and other factors. For 
example, since principal business of financial enterprises consists of borrowing, 
lending and investing, loans given and interests earned are operating cash flows 
for financial enterprises and investing cash flows for other enterprises. A few typical 
cases are discussed below. 
2.6.1 Loans/Advances given and Interests earned  
(a) Loans and advances given and interests earned on them in the ordinary 
course of business are operating cash flows for financial enterprises. 
(b) Loans and advances given and interests earned on them are investing cash 
flows for non-financial enterprises. 
(c) Loans and advances given to subsidiaries and interests earned on them are 
investing cash flows for all enterprises. 
(d) Loans and advances given to employees and interests earned on them are 
operating cash flows for all enterprises. 
(e) Advance payments to suppliers and interests earned on them are operating 
cash flows for all enterprises. 
Net Cash Flows
Operating Activities
Direct 
Method
Indirect 
Method
Investing Activities
Direct 
Method
Financing Activities
Direct 
Method
© The Institute of Chartered Accountants of India