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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 ..... ty of their generation. The Standard deals with 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares 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 used to evaluate the relationships among those acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities. 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 capitalized 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); (d) cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than receipts from those instruments considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise; 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 flows. Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the operating revenues and expenses excluding non-cash items disclosed in the statement of profit and loss and the changes during the period in inventories and operating receivables and payables. Reporting Cash Flows from Investing and Financing Activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh 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 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 28. The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed. 29. The cash flows associated with extraordinary items are disclosed separately as arising from op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 classified as cash flows from operating activities. However, when it is practicable to identify the tax cash flow with an individual transaction that gives rise to cash flows that are classified as investing or financing activities, the tax cash flow is classified as an investing or financing activity as appropriate. When tax cash flow are allocated over more than one class of activity, the total amount of taxes paid is disclosed. Investments in Subsidiaries, Associates and Joint Ventures 36. When accounting for an investment in an associate or a subsidiary or a joint venture, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 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. 47. 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 capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation 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 purchases only. Balance Sheet as at 31.12.1996 1996 (Rs. 000) Assets Cash on hand and balances with banks 200 25 Short-term investments 670 135 Sundry debtors 1,700 1,200 Interest receivable 100 Inventories 900 1,950 Long-term investments 2,500 2,500 Fixed assets at cost 2,180 1,910 Accumulated depreciation (1,450) (1,060) Fixed assets (net) 730 850 Total assets 6,800 6,660 Liabilities 150 1,890 Interest payable 230 100 Income taxes payable 400 1,000 Long-term debt 1,110 1,040 Total liabilities 1,890 4,030 Shareholders Funds 1,500 1,250 Reserves 3,410 1,380 Total shareholders funds 4,910 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) Administrativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash and cash equivalents 750 Cash and cash equivalents at beginning of period (see Note 1) 160 Cash and cash equivalents at end of period (see Note 1) 910 Notes to the cash flow statement (direct method and indirect method) 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 during the year (including tax deducted at source on dividends received) amounted to 900. Alternative Presentation (indirect method) As an alternative, in an indirect method cash flow statement, ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 237 Cash payments to employees and suppliers (997) Operating profit before changes in operating assets 4,224 (Increase) decrease in operating assets: (650) Short-term funds Deposits held for regulatory or monetary control purposes 234 Funds advanced to customers (288) Net increase in credit card receivables (360) Other short-term securities (120) Increase (decrease) in operating liabilities: Deposits from customers 600 Certificates of deposit (200) Net cash from operating activities before income tax 3,440 Income taxes paid (100) Net cash from operating activities 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 4,190 Cash and cash equivalents at beginning of period 4,650 Cash and cash equivalents at end of period 8,840 - - statute, statutory p ..... 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