***Read Important Q & A on Accounting Standards***
Cash comprises cash on hand and cash at bank. (Demand Deposits with bank)
Cash Equivalents are
Highly Liquid Investments (Maturity around 3 months)
Subject to insignificant risk of changes in value.
Cash Flows are inflows and outflows of cash and cash equivalents.
Cash Flow Statement represents the cash flows during the specified period by operating, investing and financing activities.
Operating Activities are the principal revenue-producing activities of the enterprise and other activities that are not investing activities and financing activities.
1] Cash receipts from sales of goods/services
2] Cash receipts from royalties, fees and other revenue items
3] Cash payments for salaries, wages and rent
4] Cash payment to suppliers for goods
5] Cash payments or refunds of Income Tax unless they can be specifically identified with financing or investing activities
6] Cash receipts and payments to future contracts, forward contracts when the contracts are held for trading purposes.
Cash from operating activities can be disclosed either by DIRECT METHOD OR BY INDIRECT METHOD.
Investing Activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
1] Cash payments/receipts to acquire/sale of fixed assets including intangible assets
2] Cash payments to acquire shares or interest in joint ventures (other than the cases where instruments are considered as cash equivalents)
3] Cash advances and loans made to third parties (Loan sanctioned by a financial enterprise is operating activity)
4] Dividends and Interest received
5] Cash flows from acquisitions and disposal of subsidiaries
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 borrowing of the enterprise.
1] Cash proceeds from issue of shares and debentures
2] Buy back of shares
3] Redemption of Preference shares or debentures
4] Cash repayments of amount borrowed.
5] Dividend and Interest paid
An enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities.
However, cash flows from following activities may be reported on a net basis.
Cash receipts and payments on behalf of customers
For example: Cash collected on behalf of, and paid over to, the owners of properties.
Cash flows from items in which turnover is quick, the amounts are large and the maturities are short.
For example: Purchase and sale of investments
For financial enterprise: Cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date.
For financial enterprise: Deposits placed/withdrawn from other financial enterprises
For financial enterprise: Cash advances and loans made to customers and the repayment of those advances and loans.
Foreign Currency Cash Flows:
Cash flows arising in foreign currency should be recorded in enterprise’ reporting currency applying the exchange conversion rate existing on the date of cash flow.
The effect of changes in exchange rates of cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of the changes in cash and cash equivalents during the period.
Extraordinary Items: These items should be separately shown under respective heads of cash from operating, investing and financing activities.
Investing and financing transactions that do not require the use of cash and cash equivalents should be excluded from a cash flow statement. For Example
A] The conversion of debt to equity
B] Acquisition of an enterprise by means of issue of shares
Components of cash and cash equivalents.
Reconciliation of closing cash and cash equivalents with items of balance sheet.
The amount of significant cash and cash equivalent balances held by the enterprise, which are not available for use by it.