IAS 3

Accounting Standard (AS) 3

(revised 1997)

Cash Flow Statements

Contents

OBJECTIVE

SCOPE Paragraphs 1-2

BENEFITS OF CASH FLOW INFORMATION 3-4

DEFINITIONS 5-7

Cash and Cash Equivalents 6-7

PRESENTATION OF A CASH FLOW STATEMENT 8-17

Operating Activities 11-14

Investing Activities 15-16

Financing Activities 17

REPORTING CASH FLOWS FROM OPERATING

ACTIVITIES 18-20

REPORTING CASH FLOWS FROM INVESTING AND

FINANCING ACTIVITIES 21

REPORTING CASH FLOWS ON A NET BASIS 22-24

FOREIGN CURRENCY CASH FLOWS 25-27

EXTRAORDINARY ITEMS 28-29

INTEREST AND DIVIDENDS 30-33

TAXES ON INCOME 34-35

Continued../..

56

INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND

JOINT VENTURES 36

ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES

AND OTHER BUSINESS UNITS 37-39

NON-CASH TRANSACTIONS 40-41

COMPONENTS OF CASH AND CASH EQUIVALENTS 42-44

OTHER DISCLOSURES 45-48

APPENDICES

Cash Flow Statements 53

Accounting Standard (AS) 3*

(revised 1997)

Cash Flow Statements

(This Accounting Standard includes paragraphs set in bold italic type

and plain type, which have equal authority. Paragraphs in bold italic type

indicate the main principles. This Accounting Standard should be read in

the context of its objective and the Preface to the Statements of Accounting

Standards1.)

Accounting Standard (AS) 3, ‘Cash Flow Statements’ (revised 1997), issued

by the Council of the Institute of Chartered Accountants of India, comes

into effect in respect of accounting periods commencing on or after

1-4-1997. This Standard supersedes Accounting Standard (AS) 3, ‘Changes

in Financial Position’, issued in June 1981. This Standard is mandatory in

nature2 in respect of accounting periods commencing on or after 1-4-20043 for

the enterprises which fall in any one or more of the following categories, at

any time during the accounting period:

(i) Enterprises whose equity or debt securities are listed whether in

India or outside India.

* The Standard was originally issued in June 1981 and was titled ‘Changes in Financial

Position’.

1Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2Reference may be made to the section titled ‘Announcements of the Council regarding

status of various documents issued by the Institute of Chartered Accountants of India’

appearing at the beginning of this Compendium for a detailed discussion on the

implications of the mandatory status of an accounting standard.

3 AS 3 was originally made mandatory in respect of accounting periods commencing

on or after 1-4-2001, for the following:

(i) Enterprises whose equity or debt securities are listed on a recognised stock

exchange in India, and enterprises that are in the process of issuing equity or

debt securities that will be listed on a recognised stock exchange in India as

evidenced by the board of directors’ resolution in this regard.

(ii) All other commercial, industrial and business reporting enterprises, whose

turnover for the accounting period exceeds Rs. 50 crores.

The relevant announcement was published in ‘The Chartered Accountant’, December

2000, page 65.

58 AS 3 (revised 1997)

(ii) Enterprises which are in the process of listing their equity or

debt securities as evidenced by the board of directors’ resolution

in this regard.

(iii) Banks including co-operative banks.

(iv) Financial institutions.

(v) Enterprises carrying on insurance business.

(vi) All commercial, industrial and business reporting enterprises,

whose turnover for the immediately preceding accounting period

on the basis of audited financial statements exceeds Rs. 50 crore.

Turnover does not include ‘other income’.

(vii) All commercial, industrial and business reporting enterprises

having borrowings, including public deposits, in excess of Rs.

10 crore at any time during the accounting period.

(viii)Holding and subsidiary enterprises of any one of the above at

any time during the accounting period.

The enterprises which do not fall in any of the above categories are

encouraged, but are not required, to apply this Standard.

Where an enterprise has been covered in any one or more of the above

categories and subsequently, ceases to be so covered, the enterprise will not

qualify for exemption from application of this Standard, until the enterprise

ceases to be covered in any of the above categories for two consecutive

years.

Where an enterprise has previously qualified for exemption fromapplication

of this Standard (being not covered by any of the above categories) but no

longer qualifies for exemption in the current accounting period, this Standard

becomes applicable from the current period. However, the corresponding

previous period figures need not be disclosed.

An enterprise, which, pursuant to the above provisions, does not present a

cash flow statement, should disclose the fact.

The following is the text of the Accounting Standard.

Objective

Cash Flow Statements 59

Information about the cash flows of an enterprise is useful in providing

users of financial statements with a basis to assess the ability of the

enterprise to generate cash and cash equivalents and the needs of the

enterprise to utilise those cash flows. The economic decisions that are taken

by users require an evaluation of the ability of an enterprise to generate cash

and cash equivalents and the timing and certainty of their generation.

The Statement deals with the provision of information about the historical

changes in cash and cash equivalents of an enterprise by means of a cash

flowstatementwhich classifies cash flows during the period fromoperating,

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 paytheir 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 enterprise, its financial structure (including its liquidity

and solvency) and its ability to affect the amounts and timing 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.

60 AS 3 (revised 1997)

4. Historical cash flow information is often used as an indicator of the

amount, timing and certainty of future cash flows. It is also useful in checking

the accuracy of past assessments of future cash flows and in examining the

relationship between profitability and net cash flow and the impact of

changing prices.

Definitions

5. The following terms are used in this Statement with the meanings

specified:

Cash comprises cash on hand and demand deposits with banks.

Cash equivalents are 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.

Cash flows are inflows and outflows of cash and cash equivalents.

Operating activities are the principal revenue-producing activities of the

enterprise and other activities that are not investing or financing activities.

Investing activities are the acquisition and disposal of long-term assets

and other investments not included in cash equivalents.

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 borrowings of the enterprise.

Cash and Cash Equivalents

6. Cash equivalents are held for the purpose of meeting short-term cash

commitments rather than for investment or other purposes. 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.

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 atmaturity).

Cash Flow Statements 61

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 activities.

10. A single transaction may include cash flows that are classified

differently. For example, when the instalment paid in respect of a fixed

asset acquired on deferred payment basis includes both interest and loan,

the interest element is classified under financing activities and the loan

element is classified under investing activities.

Operating Activities

11. The amount of cash flows arising from operating activities is a key

indicator of the extent towhich the operations of the enterprise 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. Information about the specific components

of historical operating cash flows is useful, in conjunction with other

information, in forecasting future operating cash flows.

12. Cash flows from operating activities are primarily derived from the

principal revenue-producing activities of the enterprise. Therefore,

they generally result from the transactions and other events that enter

into the determination of net profit or loss. Examples of cash flows from

operating activities are:

(a) cash receipts fromthe sale of goods and the rendering of services;

62 AS 3 (revised 1997)

(b) cash receipts fromroyalties, fees, commissions and other revenue;

(c) cash payments to suppliers for goods and services;

(d) cash payments to and on behalf of employees;

(e) cash receipts and cash payments of an insurance enterprise for

premiums and claims, annuities and other policy benefits;

(f) cash payments or refunds of income taxes unless they can be

specifically identified with financing and investing activities; and

(g) cash receipts and payments relating to futures contracts, forward

contracts, option contracts and swap contractswhen the contracts

are held for dealing or trading purposes.

13. Some transactions, such as the sale of an item of plant, may give rise

to a gain or loss which is included in the determination of net profit or loss.

However, the cash flows relating to such transactions are cash flows from

investing activities.

14. An enterprise may hold securities and loans for dealing or trading

purposes, in which case they are similar to inventory acquired specifically

for resale.Therefore, cash flows arising fromthe 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 towhich 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 fromdisposal of fixed assets (including intangibles);

Cash Flow Statements 63

(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 fromdisposalof shares,warrants or debt instruments

of other enterprises and interests in joint ventures (other than

receipts fromthose instruments considered to be cash equivalents

and those held for dealing or trading purposes);

(e) cash advances and loansmade to third parties (other than advances

and loans made by a financial enterprise);

(f) cash receipts from the repayment of advances and loans made to

third parties (other than advances and loans of a financial

enterprise);

(g) cash payments for futures contracts, forward contracts, option

contracts and swap contracts except when the contracts are held

for dealing or trading purposes, or the payments are classified as

financing activities; and

(h) cash receipts from futures contracts, forward contracts, option

contracts and swap contracts except when the contracts are held

for dealing or trading purposes, or the receipts are classified as

financing activities.

16. When a contract is accounted for as a hedge of an identifiable position,

the cash flows of the contract are classified in the same manner as the cash

flows of the position being hedged.

Financing Activities

17. 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. Examples

of cash flows arising from financing activities are:

(a) cash proceeds from issuing shares or other similar instruments;

(b) cash proceeds from issuing debentures, loans, notes, bonds, and

other short or long-term borrowings; and

64 AS 3 (revised 1997)

(c) cash repayments of amounts borrowed.

Reporting Cash Flows from Operating Activities

18. An enterprise should report cash flows fromoperating activities using

either:

(a) the direct method, whereby major classes of gross cash receipts

and gross cash payments are disclosed; or

(b) the indirect method, whereby net profit or loss is adjusted for

the effects of transactions of a non-cash nature, any deferrals

or accruals of past or future operating cash receipts or

payments, and items of income or expense associated with

investing or financing cash flows.

19. The direct method provides information which may be useful in

estimating future cash flows and which is 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;

Cash Flow Statements 65

(b) non-cash items such as depreciation, provisions, deferred taxes,

and unrealised foreign exchange gains and losses; and

(c) all other items forwhich 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 Activities

21. An enterprise should report separately major classes of gross cash

receipts and gross cash payments arising from investing and financing

activities, except to the extent that cash flows described in paragraphs 22

and 24 are reported on a net basis.

Reporting Cash Flows on a Net Basis

22. Cash flows arising from the following operating, investing or

financing activities may be reported on a net basis:

(a) cash receipts and payments on behalf of customers when the

cash flows reflect the activities of the customer rather than those

of the enterprise; and

(b) cash receipts and payments for items in which the turnover is

quick, the amounts are large, and the maturities are short.

23. Examples of cash receipts and payments referred to in paragraph 22(a)

are:

(a) the acceptance and repayment of demand deposits by a bank;

(b) funds held for customers by an investment enterprise; and

(c) rents collected on behalf of, and paid over to, the owners of

properties.

66 AS 3 (revised 1997)

Examples of cash receipts and payments referred to in paragraph 22(b) are

advances made for, and the repayments of:

(a) principal amounts relating to credit card customers;

(b) the purchase and sale of investments; and

(c) other short-term borrowings, for example, those which have a

maturity period of three months or less.

24. Cash flows arising from each of the following activities of a financial

enterprise may be reported on a net basis:

(a) cash receipts and payments for the acceptance and repayment

of deposits with a fixed maturity date;

(b) the placement of deposits with and withdrawal of deposits from

other financial enterprises; and

(c) cash advances and loans made to customers and the repayment

of those advances and loans.

Foreign Currency Cash Flows

25. Cash flows arising from transactions in a foreign currency should

be recorded in an enterprise’s reporting currency by applying to the foreign

currency amount the exchange rate between the reporting currency and

the foreign currency at the date of the cash flow. Arate 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,Accounting for the Effects of

Changes in Foreign Exchange Rates4. This permits the use of an exchange

4 This Standard has been revised in 2003, and titled as ‘The Effects of Changes in

Foreign Exchange Rates’. The revised Standard is published elsewhere in this

Compendium.

Cash Flow Statements 67

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 operating, investing or financing activities in the

cash flow statement, to enable users to understand their nature and effect on

the present and future cash flows of the enterprise. These disclosures are in

addition to the separate disclosures of the nature and amount of extraordinary

items required by Accounting Standard (AS) 5, Net Profit or Loss for the

Period, Prior Period Items and Changes in Accounting Policies.

Interest and Dividends

30. Cash flows from interest and dividends received and paid should

each be disclosed separately. Cash flows arising from interest paid and

interest and dividends received in the case of a financial enterprise

should be classified as cash flows arising from operating activities. In the

case of other enterprises, cash flows arising from interest paid should be

classified as cash flows from financing activities while interest and

dividends received should be classified as cash flows from investing

activities.Dividends paid should be classified as cash flows fromfinancing

activities.

31. The total amount of interest paid during the period is disclosed in the

cash flow statement whether it has been recognised as an expense in the

68 AS 3 (revised 1997)

statement of profit and loss or capitalised in accordance with Accounting

Standard (AS) 10, Accounting for Fixed Assets5.

32. Interest paid and interest and dividends received are usually classified

as operating cash flows for a financial enterprise. However, there is no

consensus on the classification of these cash flows for other enterprises.

Some argue that interest paid and interest and dividends received may be

classified as operating cash flows because they enter into the determination

of net profit or loss. However, it is more appropriate that interest paid and

interest and dividends received are classified as financing cash flows and

investing cash flows respectively, because they are costof obtainingfinancial

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 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

5 Pursuant to the issuance of AS 16, Borrowing Costs, which came into effect in respect

of accounting periods commencing on or after 1-4-2000, accounting for borrowing costs

is governed by AS 16 from that date.

Cash Flow Statements 69

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 investor restricts its reporting in the cash flow

statement to the cash flows between itself and the investee/joint venture,

for example, cash flows relating to dividends and advances.

Acquisitions and Disposals of Subsidiaries and

Other Business Units

37. The aggregate cash flows arising from acquisitions and from

disposals of subsidiaries or other business units should be presented

separately and classified as investing activities.

38. An enterprise should disclose, in aggregate, in respect of both

acquisition and disposal of subsidiaries or other business units during

the period each of the following:

(a) the total purchase or disposal consideration; and

(b) the portion of the purchase or disposal consideration discharged

by means of cash and cash equivalents.

39. The separate presentation of the cash flow effects of acquisitions and

disposals of subsidiaries and other business units as single line items helps

to distinguish those cash flows from other cash flows. The cash flow effects

of disposals are not deducted from those of acquisitions.

Non-cash Transactions

40. Investing and financing transactions that do not require the use of

cash or cash equivalents should be excluded from a cash flow statement.

Such transactions should be disclosed elsewhere in the financial statements

in a way that provides all the relevant information about these investing

and financing activities.

70 AS 3 (revised 1997)

41. Many investing and financing activities do not have a direct impact on

current cash flows although they do affect the capital and asset structure of

an enterprise. The exclusion of non-cash transactions from the cash flow

statement is consistent with the objective of a cash flow statement as these

items do not involve cash flows in the current period. 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 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 countrywhere exchange controls or other legal restrictions

apply as a result of which the balances are not available for use by the

enterprise.

Cash Flow Statements 71

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 thatmay be available

for future operating activities and to settle capital commitments,

indicating any restrictions on the use of these facilities; and

(b) the aggregate amount of cash flows that represent increases in

operating capacity separately from those cash flows that are

required to maintain operating capacity.

48. The separate disclosure of cash flows that represent increases in

operating capacity and cash flows that are required to maintain operating

capacity is useful in enabling the user to determine whether the enterprise is

investing adequately in the maintenance of its operating capacity. An

enterprise that does not invest adequately in themaintenance of its operating

capacity may be prejudicing future profitability for the sake of current

liquidity and distributions to owners.

72 AS 3 (revised 1997)

APPENDIX I

Cash Flow Statement for an Enterprise other than a

Financial Enterprise

The appendix is illustrative only and does not form part of the accounting

standard. The purpose of this appendix is to illustrate the application of the

accounting standard.

1. The example shows only current period amounts.

2. Information from the statement of profit and loss and balance sheet is

provided to show how the statements of cash flows under the direct method

and the indirect method have been derived. Neither the statement of profit

and loss nor the balance sheet is presented in conformity with the disclosure

and presentation requirements of applicable laws and accounting standards.

The working notes given towards the end of this appendix are intended to

assist in understanding the manner in which the various figures appearing

in the cash flow statement have been derived. These working notes do not

formpart of the cash flow statement and, accordingly, 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 expensewas 400 ofwhich 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.

Cash Flow Statements 73

(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

(Rs. ’000)

1996 1995

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

Sundry creditors 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

Share capital 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

74 AS 3 (revised 1997)

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 (300)

Net profit 3,230

Direct Method Cash Flow Statement [Paragraph 18(a)]

(Rs. ’000)

1996

Cash flows from operating activities

Cash receipts from customers 30,150

Cash paid to suppliers and employees (27,600)

Cash generated from operations 2,550

Income taxes paid (860)

Cash flow before extraordinary item 1,690

Proceeds from earthquake disaster settlement 180

Net cash from operating activities 1,870

Cash flows from investing activities

Purchase of fixed assets (350)

Proceeds from sale of equipment 20

Interest received 200

Dividends received 160

Net cash from investing activities 30

Cash Flow Statements 75

Cash flows from financing activities

Proceeds from issuance of share capital 250

Proceeds from long-term borrowings 250

Repayment of long-term borrowings (180)

Interest paid (270)

Dividends paid (1,200)

Net cash used in financing activities (1,150)

Net increase in 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

Indirect Method Cash Flow Statement [Paragraph 18(b)]

(Rs. ’000)

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

Operating profit before working capital changes 3,740

Increase in sundry debtors (500)

Decrease in inventories 1,050

Decrease in sundry creditors (1,740)

Cash generated from operations 2,550

Income taxes paid (860)

Cash flow before extraordinary item 1,690

Proceeds from earthquake disaster settlement 180

1996

Net cash from operating activities 1,870

76 AS 3 (revised 1997)

Cash flows from investing activities

Purchase of fixed assets (350)

Proceeds from sale of equipment 20

Interest received 200

Dividends received 160

Net cash from investing activities 30

Cash flows from financing activities

Proceeds from issuance of share capital 250

Proceeds from long-term borrowings 250

Repayment of long-term borrowings (180)

Interest paid (270)

Dividends paid (1,200)

Net cash used in financing activities (1,150)

Net increase in 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 Flow Statements 77

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 indirectmethod cash flow statement, operating profit

before working capital changes is sometimes presented as follows:

Revenues excluding investment income 30,650

Operating expense excluding depreciation (26,910)

Operating profit before working capital changes 3,740

Working Notes

The working notes given below do not form part of the cash flow statement

and, accordingly, need not be published. The purpose of these working

notes is merely to assist in understanding the manner in which various

figures in the cash flow statement have been derived. (Figures are in

Rs. ’000.)

1. Cash receipts from customers

Sales 30,650

Add: Sundry debtors at the beginning of the year 1,200

31,850

Less : Sundry debtors at the end of the year 1,700

30,150

78 AS 3 (revised 1997)

2. Cash paid to suppliers and employees

Cost of sales 26,000

Administrative and selling expenses 910

26,910

Add: Sundry creditors at the beginning of the 1,890

year

Inventories at the end of the year 900 2,790

29,700

Less:Sundry creditors at the end of the year 150

Inventories at the beginning of the year 1,950 2,100

27,600

3. Income taxes paid (including tax deducted at source fromdividends

received)

Income tax expense for the year (including tax deducted 300

at source from dividends received)

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 400

Add: Interest payable at the beginning of the year 100

500

Less: Interest payable at the end of the year 230

270

APPENDIX II

Cash Flow Statements 79

Cash Flow Statement for a Financial Enterprise

The appendix is illustrative only and does not form part of the accounting

standard. The purpose of this appendix is to illustrate the application of the

accounting standard.

1. The example shows only current period amounts.

2. The example is presented using the direct method.

Cash flows from operating activities

Interest and commission receipts 28,447

Interest payments (23,463)

Recoveries on loans previously written off 237

Cash payments to employees and suppliers (997)

Operating profit before changes in operating assets 4,224

(Increase) decrease in operating assets:

Short-term funds (650)

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)

(Rs. ’000)

1996

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

80 AS 3 (revised 1997)

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