A cash flow statement when used along with other financial statements provides information that enables users to evaluate changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timings of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.
It also helps in balancing its cash inflow and cash outflow, keeping in response to changing condition. It is also helpful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and impact of changing prices.
ASCERTAINING CASH FLOWS FROM OPERATING ACTIVITIES
- Non-cash items such as depreciation , discount on shares, etc., be written off
- Interest and Dividend
- Extra Ordinary Items
- Taxes on Income
- Foreign Currency Cash Flows
- Investments in Subsidiaries, Associates and Joint Venture
- Non-Cash Transactions
Cash receipts from customers = Revenue from operations + Trade receivables in the beginning – Trade receivables in the end. Cash payments to suppliers = Purchases + Trade Payables in the beginning – Trade Payables in the end. Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss.
Moreover, it also includes certain non-operating items such as interest paid, profit/loss on sale of fixed assets, etc.) and non-cash items (such as depreciation, goodwill to be written-off, etc. Therefore, it becomes necessary to adjust the amount of net profit/loss as shown by Statement of Profit and Loss for arriving at cash flows from operating activities. As per AS-3, under indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effect of.
-cash items such as depreciation, goodwill written-off, provisions, deferred taxes, etc., which are to be added back. All investing and financing incomes are to be deducted from the amount of net profits while all such expenses are to be added back. For example, finance cost which is a financing cash outflow is to be added back while other income such as interest received which is investing cash inflow is to be deducted from the amount of net profit.
While preparing the cash flow statement, all major items of gross cash receipts, gross cash payments, and net cash flows from investing and financing activities must be shown separately under the headings ‘Cash Flow from Investing Activities’ and ‘Cash Flow from Financing Activities’. Cash flows from interest and dividends received and paid should be disclosed separately and classified on the basis of nature of the enterprise as shown below:. i) Interest paid and received, dividend received as operating activities. ii) Dividend paid as financing activities. i) Interest and dividend received as investing activities. ii) Interest and dividend paid as financing activities. The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate.
Cash flows arising from taxes on income should be separately disclosed and should be classified as cash-flows from operating activities under they can be specifically identified with financing and investing activists. i) Provision for Taxation for the current year — Non cash charge under operating activity (ii) Tax paid — Operating cash out flow. iii). Income tax refund — Cash inflow from operating activity (iv) Capital gains tax — Cash out flow from investing activity. v) Corporate dividend tax — Cash out flow from financing activity. Foreign currency cash flows should be converted at the exchange rate of the date of cash flow.
Investing and financing transactions that do not require the use of cash or cash equivalents are not shown in the cash flow statement. Ind AS 7, Statement of Cash flows, prescribes principles and guidance on preparation and presentation of cash flows of an entity from operating activities, investing activities and financing activities for a reporting period,.
Objective
IND AS 7: CASH FLOW STATEMENT
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Cash and cash equivalents include demand deposits, certain short-term investments and in some cases, bank overdrafts.
For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value, therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preference shares acquired within a short period of their maturity and with a specified redemption date. However, where bank overdrafts which are repayable on demand form an integral part of an entity's cash management, bank overdrafts are included as component of cash and cash equivalents A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.
Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an entity to generate cash and cash equivalents and the timing and certainty of their generation.
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