INTRODUCTION
Accounting Standard 3, Cash Flow Statements, was issued in March, 2004. This revised
Accounting Standard super seeded the Accounting Standard (AS 3) on changes in Financial
Position, issued in June 1981.
Cash flow statement provides information about the changes in cash and cash equivalents of
an enterprise. Cash flow statement is based on cash concept of profit. Cash flow statement
seems to be useful because it identifies cash generated from trading operations, the operating
cash surplus which can be applied for investment in fixed assets. In fact a portion of cash from
operations is used to pay dividend and tax and the other portion is ploughed back. What can
be ploughed back is directly identifiable from cash flow statement. In projected form, this
statement is a very useful tool of planning.
Cash flow statements are prepared to explain the cash movements between two points of
time.
Sources of Cash:
1. Issue of shares and debentures and raising long-term loan.
2. Sale of investments and other fixed assets.
3. Cash from operations.
4. Decrease in Cash.
Applications of Cash:
1. Redemption of preference shares and debentures and repayment of long-term loan.
2. Purchase of investments and other fixed assets.
3. Payment of tax.
4. Payment of dividend.
5. Increase in cash.
Increase in cash or decrease in cash is put in the applications and the sources respectively
just to balance the cash flow statement. At this juncture students may note that in cash flow
statement changes in all balance sheet items are to be taken into consideration separately for
explaining movement of cash.
2.2 ELEMENTS OF CASH FUND
As per AS 3, issued by the Council of the ICAI, ‘Cash Funds’ include:
(i) Cash in hand,
(ii) Demand deposits with banks, and
(iii) Cash equivalents.
Cash equivalents which are considered as part of funds for calculation of cash flows are defined as
‘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”. Basic objective of acquisition of
cash equivalents is to deploy, for a short period, idle cash required to meet short-term cashcommitments. Securities with short maturity period of, say, three months or less from the date of
acquisition qualify as a cash equivalent. Examples are: acquisition of preference shares, shortly
before their specified redemption date, bank deposits with short maturity period, etc. Thus, cash
flow statement deals with flow of cash funds but does not consider the movements among cash,
bank balance payable on demand and investment of excess cash in cash equivalents. Examples
are cash withdrawn from current account, cash deposited in bank for 60 days, etc.
2.3 CLASSIFICATION OF CASH FLOW ACTIVITIES
Transactions, which increase cash, are classified as cash inflow and transactions which
decrease cash are classified as cash outflow. Thus, cash flow statement provides explanation
for changes in cash position of the business entity. Accounting Standard issued by the
Institute of Chartered Accountants of India require that the cash flow statement should report
cash flows during the period classified by operating, investing and financing activities:
2.3.1 Operating Activities: These are the principal revenue producing activities of the
enterprise. Net impact of operating activities on flow of cash is reported as ‘Cash flows from
operating activitiThe amount of cash flows from operating activities is a key indicator of the extent to which the
operations of the enterprises have generated sufficient cash flows to maintain the operating
capability of the enterprise, pay dividends, repay loans, and make new investments without
recourse to external sources of financing. It provides useful information about internal
financing. Information about the specific components of historical operating cash flows is
useful, in conjunction with other information, in forecasting future operating cash flows.
2.3.2 Investing activities: These are the acquisition and disposal of long-term assets and
other investments not included in cash equivalents. The separate disclosure of cash flows
arising from investing activities is important because the cash flows represent the extent to
which the expenditures have been made for resources intended to generate future incomes
and cash flows.
2.3.3 Financing activities: These are the activities that result in changes in the size and
composition of the owner’s capital (including preference share capital) and borrowings of the
enterprise. The separate disclosure of cash flows arising from financing activities is important
because it is useful in predicting claims on future cash flows by providers of funds (both
capital and borrowings) to the enterprise. es’ or ‘cash from operation’.