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TMI BlogCash Flow StatementsX X X X Extracts X X X X X X X X Extracts X X X X ..... the 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 enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally 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, warrants or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 non-cash items; and (iii) other items for which the cash effects are investing or financing cash flows. 20. Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of: (a) changes during the period in inventories and operating receivables and payables; (b) non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign exchange gains and losses; and (c) all other items for which the cash effects are investing or financing cash f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 26. 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. 27. 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 en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 out of operating cash flows. However, it is considered more appropriate that dividends paid should be classified as cash flows from financing activities because they are cost of obtaining financial resources. Taxes on Income 34. Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. 35. Taxes on income arise on transactions that give rise to cash flows that are classified as operating, investing or financing activities in a cash flow statement. While tax expense may be readily identifiable with investing or financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period from the cash flows of the underlying transactions. Therefore, taxes paid are usually c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod. 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 (c) the conversion of debt to equity. Components of Cash and Cash Equivalents 42. 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. 43. 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. 44. 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 45. 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. 46. There are various circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, 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). (a) An amount of 250 was raised from the issue of share capital and a further 250 was raised from long-term borrowings. (b) Interest expense was 400 of which 170 was paid during the period. 100 relating to interest expense of the prior period was also paid during the period. (c) Dividends paid were 1,200. (d) Tax deducted at source on dividends received (included in the tax expense of 300 for the year) amounted to 40. (e) During the period, the enterprise acquired fixed assets for 350. The payment was made in cash. (f) Plant with original cost of 80 and accumulated depreciation of 60 was sold for 20. (g) Foreign exchange loss of 40 represents the reduction in the carrying amount of a short-term investment in foreign-currency designated bonds arising out of a change in exchange rate between the date of acquisition of the investment and the balance sheet date. (h) Sundry debtors and sundry creditors include amounts relating to credit sales and credit pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Indirect Method Cash Flow Statement [Paragraph 18( b )] (Rs. '000) 1996 Cash flows from operating activities Net profit before taxation, and extraordinary item 3,350 Adjustments for: Depreciation 450 Foreign exchange loss 40 Interest income (300) Dividend income (200) Interest expense 400 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income tax expense for the year (including tax deducted at source from dividends received) 300 Add : Income tax liability at the beginning of the year 1,000 1,300 Less: Income tax liability at the end of the year 400 900 Out of 900, tax deducted at source on dividends received (amounting to 40) is included in cash flows from investing activities and the balance of 860 is included in cash flows from operating activities (see paragraph 34). 4. Repayment of long-term borrowings Long-term debt at the beginning of the year 1,040 Add : Long-term borrowings made during the year 250 1,290 Less : Long-term borrowings at the end of the year 1,110 180 5. Interest paid Interest expense for the year 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,340 Cash flows from investing activities Dividends received 250 Interest received 300 Proceeds from sales of permanent investments 1,200 Purchase of permanent investments (600) Purchase of fixed assets (500) Net cash from investing activities 650 Cash flows from financing activities Issue of shares 1,800 Repayment of long-term borrowings (200) Net decrease in other borrowings (1,000) Dividends paid (400) Net cash from financing activities 200 Net increase in cash and cash equivalents ..... X X X X Extracts X X X X X X X X Extracts X X X X
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