Fund Flow and Cash

Flow Statement

Ganesh Limited is into

r;:T:;:::tiili:iflt":ll'ff
it iil"?,':';::t",?:fl ffi :,,;l:",j.:t
was found rhat even thoush the ,".ora.
ur"-rr,"*,"n'iiiilii. i#r"" ii1
i,"-i;,I^.?'"jl::;jj"
payments jlrl
to creditors, etc.
unabie to ,ur,l"o,.oursements of
sal
^was they wanl ,"-t""r'ii""";:"J;.'..::".1;
.Now,
L:_ol:I.:::.:",1::.^::i_il t..,_, .,.k; ;;; ;;:,
u,'" answerabre ro
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il:
car.,,taro .."-
how ro carcurate
: :l : ! of their illiquidity,
j::::, ."pit"i "
n

In thrs chapter, Vo., *if i

rhe workins
,..
statement and the cash position of the
ir"l" # il,il:"J"if,::l;l"i,l,] t,

business Jsirig".urn flow statement.

After reading this chapter, you will
be able to:
* Explain the meaning, significance and limitations
ot fund flow statement
t Prepare fund flow statement
* Explain the meaning, significance and limitations
{. Discuss the different acuvities under cash flow of cash flow statement
statement
o the concept of cash inflow and outflow
under different activities
"ayl,fu* to the cash flow statement
belonging
.:. Analyze the methods of preparing
cash flow statement
,4

The change in the working capital may or may not depict the situation of the
company correctly. There is a unique significance to know the cash movement in
business for the management and investors. Cash flow situation of the company
will differ from the fund flow situation since fund flow focuses on the working
capital which may not necessarily depict the cash position of the business,
Accounting Standard-3 (AS-3) gives details on the cash flow statement, and it is
not mandatory to small and medium-sized companies, even though they are
encouraged to do so. According to this standard, the changes in the cash and
cash equivalents should be disclosed in the form of a cash flow statement.
Cash flow statement can be defined as, "a statement informlng about the
movement of cash that is cash inflow or cash outflow." The definition emphasizes
on the inflow and outflow of cash. The cash flow statement shows the use of cash
in business and answers about the ability of the business to generate cash. It
helps to know the liquidity position and the capital budgeting policy of the
comoanv.
 Fund Flow and Cash Flow Statement 305

Significance of Cash Flow Statement

.1. It is highly used for short-term cash position analysis.
.:. It is used for appropriate short-term financial planning.
'l It is used for evaluating the creditworth iness of the business
to meet its
obligations towards the creditors, bank loan repayments, interest
payments, tax payments, dividend payments, etc.
.1. It is used for appraising the viability of the varrous capital
intensive
prol ects.
* It is used as a tool by the bankers to review the financial position of the
company.
* It helps in explaining the relationship between poor cash position and
substantial profits.
Limitations of Cash Flow Statement
T * Cash flow statement cannot be
l *
decision-making process.
a substitute to the income statement,
since both are different in the utility they provide to managers in the

It is a very narrow concept compared to fund flow statement.

'! The term cash cannot be defined precisely since it may include different
other forms of cash as well.
Preparation of Cash Flow Statement
A cash flow statement can be prepared using the following information:
.i. Comparative balance sheets at two points of time (at the beginning and
end of the accounting year).
I * Income statement or profit and loss account for the current accountino
he vear.
in * Selected data to find the hidden transactions.
ny
ng under cash flow statements, activities are divided into three major parts-
;s. operating activities, investing activities and financing activities.
is
re
10.4.1 Cash Flow from Operating Activities
'rd
The principal revenue producing activities are known as operating activities.
These activities are majorly related to the determination of net pcoiit/net loss.
le The following are cash flow items from operating activities:
!
* Cash receipts from the sale of goods or services provided.
;h .i Cash receipts for royalties, commission, fees and other revenues.
It .1.
le Cash payments for payment made to suppliers for goods and services.
305
Accounting for

.:. Cash payments made to the employees.

.:. Payment made for tax, working capital, etc.
Computation of Cash Flow from Operating Activities
Cash {ow from operating activities is computed under two methods
method an! indirect method.
10.4.1 .1 Direct Method
In this method. the computation of the cash flows from operating activities
done by taking the gross receipts on various operating activities and g
payments affected during the period. The format given below displays
calculating cash flow from operating activities under the direct method.
Direct Method of Calculating Cash Flow from Operating Activities

Cash Sales XX

Cash Receipts from Customers XX

Cash Paid to Suppliers (XX)

Cash Paid to Employees (XX)

Cash Paid for Expenses (XX)

Cash Generated from Operations XX

Income Tax Paid (XX)

Cash Flows before Extraordinary Items XX

PaymenVReceipt from Extraordinary Items (xx)/xx

Net Cash from Operating Activities XX

ltote.'Whenever there is a cash outflow. the amounts are shown in brackets

which represent the minus sign.
10.4.1.2 lndirect Method
Under indirect method, the net cash flow from operating activities is
calculated by adding the non-cash expenses and non-operating expenses to the
net profit before income tax and subtracting non-cash and non-operating
incomes from it. The balance is net cash from operating activities. The cash flow
from operating activities (Indirect Method) is shown below.
 Fund Flow and Cash Flow Statement

Indirect Method of Calculating Cash Flow from Operating Activities

Net Profit/Loss before Tax and Extraordinary Items xxx

Add.' Deductions of non-cash items already made in profit and loss XXX
account such as depreciation, goodwill to be written off, etc.
,4dd.' Deductions already made in profit and loss on account of XXX
non-operating items such as penalty paid, loss on sale of fixerl
assets, etc.
Less.'Additions made in proflt and loss on account of non- XXX
operating items such as dividend received, profit on sale of fixed
assets/ etc.
Operating Profit before Working Capital Changes xxx
Add.' Decrease in the Working Capital XXX
Less; Increase in the Working Capital XXX
Cash Flow from Operating Activities before Tax and xxx
Extraordinary Items
Less.' Income Tax Paid XXX
Add/Less: Extraordinary Items (if any) XXX
Net Cash from Operating Activities xxx
10.4.2 Cash Flow from Investing Activities
The purchase and sale of fixed assets and other investments which are not
included in cash equivalents are called investing activities. such activities are the
application of funds which are placed on the balance sheet asset side. The
examples of cash flows from investing activities are:
.i. Cash payments made to purchase fixed assets.
* Cash receipts on the sale of fixed assets.
.1. Cash payments made to acquire investments.
.t Cash receipts on the disposal of the shares, debt instruments, etc.
* Cash receipts on the interest received and dividend receivcd on the
investments.
n Cash loans and advances made to the third parties. i
.:. Cash receipts from the repayment of advances and loans qilen tc the
th ird pa rties.

The format of estimating the net cash flow from investinq activities are
shown below.
308 Accounting for

Cash Flow from Investing Activities

,,,,,,,;i1,,,,,,',:,, ;,;,,,,,,,,,,,,,,.,.,,
Cash Purchase of Fixed Assets (XX)
CSsh Sales of Fixed Assets XX

In@rest Received on the Investments XX

Dividend Received XX

10.4.3 Cash Flow from Financing Activities

Activities which affect the owner's equity and the borrowings of the company
are known as financing activities. The examples of cash flow from financing
activities are:
* Cash receiots from the issue of shares.
n Cash receipts from the issue of debentures, loans and other borrowings.
n Cash repayments for the amounts that were borrowed.
* Cash repayments for the redemption of preference shares and
debentures.
* Cash payments of dividends.
* Cash payment of interest on debentures and loans.
The format for estimating the net cash flow from financing activities is shown
below.
Net Cash Flow from Financing Activities

Issue/Redemptiorr of Preference Shares/Debentures

Buyback of Equity Shares
Premium/Discou nt on Issue of Shares/Debentures
Premium/Discount on Redemption/Buyback
Bank Loan Taken/Repaid
Interest on Loan Paid/Dividend Paid

The figure below gives a summary of the activities under cash flow statement'
 309
Fund Flow and Cash Flow Statement

All the primary activities of business. Cash flow from these

activities show the operating ability of the firm For example'
sale of goods, expenses pard, tax paid, worklnq capital,
rovalties received, etc.

All the activities related to the investment of the company In

fixed assets, long-term investment, return from
etc. For example, purchase/sale of fixed assets or 'nvestrnent,
investments, d ividend received, etc.
ly
rg

All the activities related to arranging the finance For

examgle, issue of shares/debentures, dividend/interest paid,
loan taken/repaid, etc.

1d
Fig. 10.1: Three Malor Activities under Cash Flow Statement

Examo|esofcashinf|owandcashoutf|owunderthethreeactivitiesaregiven
the figure below.

Operating Activities Investing Adlvlties Flnancing Activities

Cash Sale of goods or Sale of fixed Issue of shares/

i Inflow services, royalties assets/investments, debentures, any loan
received, commission dividend received on taken, etc.
received/ fee investments, interest
1 received, decrease in on loan given,
current assets, repayment of loan
increase in current given, etc.
I liabilities, etc.
Redemption of Pref .

l Payment made to Purchase of fixed

suppliers, purchase of assets/investments, shares/debentures,
goods and services, loan given to third buyback of equity
tax paid, increase in party, etc. shares, loan
rnt
current assets, repaymtnt, interest
decrease in current paid on ban, dividend
liabilities, etc. distributed, etc.

Fig. 10.2; Cash Inflow and Cash Outflow of Three Activities

 Accounting for

10.4.4 Preparation of a Cash Flow

Statement
Example 3:
The following is the summary of cash
transactions extracted from the
of M/s Limited.
Summary of Cash Transactions

You are required to prepare a cash

period ended March 31,200g by
flow statement of the company for the
direct method.
Solution 3:
In the Books of M/s Usha Limited
Cash Flow Statement for the_ year
enA;ng lla.ctr ef, 2008
(Direct Method)

Cash Flows from Operating Activities

Cash Receipts from Customers
Cash paid to Suppliers
Cash paid as Wages and Salaries
Cash paid for Expenses (Overheads)
Cash Generated from Operatlons
Net Cash Flow from Operating Activities (A)
Cash Flows from Investing Activities
(1o,ooo)
Cash Receipts from the Sale of Fixed
Assets
Cash payments for purchase of Fixed
Assets
Net Cash Flow FROM Investing Activities
(B) (3,oo0)
Cash Flows from Financing Activities
Fund Flow and Cash Flow Statement 311

Cash Receipts from Shares Issued 15,000

Cash Payment for Bank Loan (4,000)
Cash Pavment of Dividends (3,000)
Net Cash Flow from Financing Activities (C)
Net Increase in Cash and Cash Equivalents (s,ooo)
(A+B+C)
Cash and Cash Equivalents at the Beginning of the 1O,O0O
Period
Cash and Cash Equivalents at the End of the Period
Example 4:
From the following data provided below of a company as on March 3l (2OO7
and 2008), prepare cash flow statement as per indirect method' During the
current year, < 15,000 was paid as dividends' Income tax paid during the
year
was<12,0O0.Amachinecostingtl0,000(W.D.V'{4,000)wassoldfor(8,000'
Financial Posation of a ComPanY

Cash Flow Statement for the Year Ended March 31, 2OO8
(Indirect Method)

Closing Balance of Profit and Loss Account

(s,000)
Lessi opening Balance of Profit and Loss Account
Adjustments for:
Proposed Dividend 15,00 0

Profit on Sale of Machinery ( 4,000 )

 Accuunting,or
Provision for Tax
12,gq0 23,000
Cash Flow from Operations before
Working Capital Changes L
l eqt. ln.rease In Debtors 18,000
(1,000)
Increase in Stock
(2,000)
Adt Increase in Current Liabilitres
18,0 00 15,000
CasB Flow from Operatjng Activrties
before Tax
Le-ss.' Tax paid 33,000
Net Cash Flow from Operating Activities ( 12,O00)
(A)
Cash Flow from fnvesting Activities 21,000
Purchase of Land and Bujlciing
(2,s00)
Purchase of lvlach inery
(20,000)
Sale of Machinery
8,000
Net Cash Flow From Investing Activities
(B) ( r4.so0)
Cash Flow from Financing Activities
Issu€ of Equ ity Shares
10,0 0 0
Loans Taken from a Subsidiary I

Bank Loan Repaid 5,000

(6,000)
Dividend paid
Net Cash Flow from Financing Activities L1s,0001 i I
(C)
i
Net Increase in Cash and Cash Equivalents

iAcld:
Opening Balance of Cash and Cash
Equivalents
f
1e,ooo;
.'l I

Lclg:'ng B+!!"
1,OO0
"f !9:! 1,d !".h EqllvlLelTs
ttoo-l
]

Working Note:
Machinery A/c
Amount
To Balance b/d (r)
To Cash ,000
4

] zs,ooo 1

[4,"r"]

Case Study 1

Following are the two Balance

sheets of a l4ls WYP Ltd. as on lYarch 31,
2019 and March 37,2020.
Fund Flow and Cash Flow Statement

After taking into consideration the following additional information, you are
required to prepare a Cash Flow Statement for the year ended March 31,2020:
(a) During the year machinery with WDV of { 30,000 (depreciation written
off { 20,000) was sold for t 25,OOO/-.
(b) Accumulated depreciation on plant & machinery as on March 2019 and
March 2020 is{ 2,25,OOO/- and< 2,75,OOOI- respectively.
(c) During the year, some investments were sold for t 28,000/-.
(d) Liability for Taxation for the year 2077 was fixed at < 57 ,000/-.
(e) During the year, the company has paid < 70,OOO/- towards dividend on
,l+.,
^^. u rLy >r -,^^E5,
^L ror
Eq

For Practice:
1. You are required to prepare Comparative Balance Sheets in Schedule III
Format as per Companies Act, 2103 and give your interpretation for the
sa me.
2. You are required to prepare Common Size Balance Sheets in Schedule III
Format as per Companies Act, 2103 and give your interpretation for the
same.
3. Calculate all the relevant ratios and give your interpretation forlhe same.

Case Study 2

Following are the two Balance sheets of M/s Excel Ltd. as on March 31, 2019
and March 3L.2020.
 Accounting for

Equity Capital 7 ,00,oo0 8,00,o00 Goodwill

8olo Preference 60,000 s0,000
3,00,0 0 0 2,00,000 Buildings
Capital 4,25,000 3,9 0,00 0
General Reserve 2,35,OOO 3,2 s,000 Machinery
SurolS 6,70,400 8,03,150
90,0 0 0 93,000 Furniture
12olo Dibentures 40,000 36,000
2,00,0 0 0 1,50,000 Investments cl
Term Loan 1,20,000 9 0,000
1,2 0,000 1,3 0.000 Inventories
Accounts 7,67,500 1,60,000
Pa yab le
Bills Payable
60,0 0 0

32,000
6 5,500 Book Debts 1,56, B0 0 1,68,60 0 I
30,600 Bills Receiva ble
Expenses B 3,000 9 2,00 0
11,500 72,700 Cash & Bank
Payable
Provision for Tax 30,0 0 0 31,000 Debentures
Discount
Provision for 35,000
LEAVC
40,000
Encashment
Unclaimed 2,500
Dividend 3,000

After taking into consid_eration

the following additional information, you
*1ii"11Tpare a cash now statemenf;;;';";, are
ended March 3t,
'-' '' ' ' z'v'v
2ozo:'
(a) Debentures were reoeemed @ 5 o/o premium J L

(b) Some investments were sold for t 38,000/_.

tt' o'"d'nn and rurniture is due to depreciation
il;"fi;i'io":.'n charsed
(d) The balances tn ,11
1T^rTutated depreciation on Machinery A/c are as
under: 2019 _ T 2,03,000, ,Ort:
(e) One machine having original cost Jj:O;;OO.
of ? g5,O0O
rhe totat aepreciation ac.r-rn,jlt"owas sold during the year
:1r..;.1:ra on this machine was
(f)
,: ) 3#t1 ;: ;;
Preference shares r

fi : :il?
;.,'":T :' #:"# Hi1"0,1"."
".", nu..
rorijiacti[bTl'\ dlL'u,-l,Lr!-q rr {c.,c s( t:.r,
1' to prepare comparative Barance sheets
I:u-1:e_required
-t per companies Act, in schedure III
2103 unagiu;;o-r, interpretation
;.il", for the
Fund Flow and Cash FIow Statement 315

2. You are required to prepare Common Size Balance Sheets in Schedule III
Format as per Companies Act, 2103 and give your interpretation for the
same.
3. Calculate all the relevant ratios and give your interpretation for the same.
In the next chapter, you will study Cost Accounting concepts and
classification of Costs and Cost Sheet.

t Transactions are of two types - one which causes flow of funds and
other that do not cause flow of funds.
* Fund fiow statement consists of a schedule of working capjtal changes
and statement of sources and aDDlication of funds.
* Cash inflow includes all the elements or transactions that brinq cash into
the business.
* Cash outflow includes all the elements or transactions that take cash out
of the business.
.t Under cash flow statement, all business activities are classified into three
parts
- operating activities, investing activities and financing activities.
.:. There are two methods of preparing cash flow statement on the basis of
calculating cash flow from operating activities; these are direct method
and indirect method.

1. Prepare Cash Flow (Indirect Method) from given information:

Income Statement of Ryan Ltd. as on March 31, 2019
Particulars
Sales and Other Income 6,98,000
Less. Cost of Sales 5,20,000
Gross Prof it 1,78,OO0
Less: Expenses
Depreciation 37,000
Selling and Administrative Expenses 1, 10,000
t
I nte rest 23,000
Total Expenses L,76,ooo
Net Income 8,OOO
Add. Income
Interest Income 6,000
 Accounting for

Profit on Sale of Investment

12,000
Less,' Expenses
Loss on Sale of plant
3,000
Profit before Tax
.' Provision
for Tax
after Tax

Assets
Plant and Equipment
7,15,000 s,05,000
Less.' Accumulated Depreciation
(1,03,000) (68,000)
Plant and Equipment (Net)
6,72,00O 4,37,000
Long-term Investments
1,15,000 t,27,000
Inventories
t,44,OOO 1,10,000
Debtors
47,0OO s5,000
Bank
46,000 15,000
Prepaid Expenses
1,000 5,000
TOTAL
Liabilities
Equity Capital
4,65,000 3,15,000
Reserves and Surplus
1,40,000 1,32,000
Term Loans
2,95,000 2,45,OOO
Creditors
50,000 43,000
Outstanding Expenses
12,000 9,000
Provision for Tax
3,000 5,000
TOTAL
The following additional information is provided
fo. the year 201g_19:
(a) Term Loans of < 5O,0OO was taken during the year.
(b) Plant costing { 10,000 having accumulated depreciation
was sold for t 5,000.
of { 2,
(c) Dividend of a 8,000 was paid during the year.
(d) Sold investments for { 1,02,000. These investments
cost { 90,OO0.
(e) Tax provided during the year T 7,O00/_.
2. Following is the Balance parag Industries Ltd.
_sheets of
for the years 2074 and 2OIS.
are given below
 Fund flow rnd Cash flow Stdtemenr

Other Information:
(a) On March 37, 2015, plant & Machinery (valued at cost ? 2,50,000;
accumulated depreciation written off t 1,60,000) were sold
for
{ 1,00,000.
(b) Income tax paid during the year t 3,75,000.
t'c \ Accumulated depreciation
on plant & Machinery as on March 2014
and 2015 is t 2,25,000 and { 2,75,000 respectively.
(d) Interim dividend paid during the year { 50,000 (FV _ t 10 each).
Lou are required to prepare Cash Flow Statement for the year ended
March 31,2015.
3. The following two balance sheets of XyZ Ltd. are available as
on March
31, 2076 and March 3I, 2017.

Equity Capita 4,0 0,0 00 4,50,000 lLand & Buitding

I
3,so,ooo l, o,uo,ooo
). I
100/oPreference 3,0 0,000 2,00,000 I Machinery
Share Capital
5,02.000 I s,04,000

General Reserve 1,9 0,000 2,50,000 | Investments 70,000 1,2 0,000

Profit & Loss A/c 1,3 0,000 2,60,000 | Stock 1,0 5,000 1,3 5,000
 Accounting for

12olo Debentures 2,0 0,000 3,0 0,000 Sundry Debtors 1, s0,000 2,r0,
Sundry Creditors 30,000 3 5,000 Cash & Bank s0,000 60,
Expenses 10,000 9,000 Preliminary 65,000 60
Payable Expenses
Provi$on for Tax 3 2,000 45,000
I
After taking into consideration the following additional i
prepare cash Flow statement.
(a) Accumulated depreciation on Machinery as on March 31, 2016 was
< 2O5,OO0/- and on March 3l,2OI7 was ? 2,55,000/_.
(b) A machine with a book vatue of { 3O,0OO (WDV of < 15,000) was
for T 18.000.
(c) During the year, Interim dividen d of l0o/o was paid on the
balance of equity share capital.
(d) Tax paid is < 32,000.

Accounting for Management - Dr. N.p. Srinivasan and Dr. M. Sakth

Murugan, S.Chand, Revised Edition 2019.
t Financial Accounting for Management _ D.D. Harsolekar. Edu
Publishing Co., 6/e, 2OL3.
Educational Material on Indian Accounting Standard (ind AS_
developed by The Institute of Chaftered Accountants of India, Feb 201
The Publication Department on behalf of the Institute of Cha
Accountants of India, Sahitya Bhawan publications.
* Compendium of on Indian Accounting Standard developed by
Institute of Chartered Accountants of India, l/e, Feb 21tgi,
Publication Department on behalf of the Institute of C
Accountants of India by Sahitya Bhawan publications.
Fund Flow and Cash Flow Statement 3r9

Indian Accounting Standard (Ind AS) - 7

Statement of Cash Flows
(This Indian Accounting Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the main
principles.)

Ob jective
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 eouivalents and the needs of the entity to utilize 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.
The objective of this Standard is to require the provision of information about
the historical changes in cash and cash equivalents of an entity by means of a
statement of cash flows which classifies cash flows during the period from
operating, investing and financing activities.

Scope
1. An entity shall prepare a statement of cash flows in accordance with the
requirements of this Standard and shall present it as an integral part of
its financial statements for each Deriod for which financial statements are
presented.
IRefer Appendix 1]
J. Users of an entity's financial statements are interested in how the entity
generates and uses cash and cash equivalents. This is the case
regardless of the nature of the entity's activities and irrespective of
whether cash can be viewed as the product of the entity, as may be the
case with a financial institution. Entities need cash for essentially the
same reasons, however different their principal revenue- producing
activities might be. They need cash to conduct their operatiorns, to pay
their obligations, and to provide returns to their investors. A\cordingly,
this Standard requires all entities to present a statement of casfi flows.

ts of Cash Flow Information

^ A statement of cash flows, when used in conjunction with the rest of the
financial statements, provides information that enables users to evaluate
 Accounting for
320

the changes in net assets of an entity, its financial structure (incl[

liquidity ind solvency) and its ability to affect the amounts and ti
cash flows in order to adapt to changing circumstances ano
Cash flow information is useful in assessing the ability of the
and enables users to develop mod
? generate cash and cash equivalents
I io "ttess and compare the present value of the future cash flows
different entities. It also enhances the comparability of the reporting
operating performance by different entities because it eliminates
effects of using different accounting treatments for the s

transactions and events'

5. Historical cash flow information is often used as an indicator of
amount, timing and certainty of future cash flows. It is also useful
checking the accuracy of past assessments of future cash flows and
examining the relationship between profitability and net cash flow
the impact of changing Prices'

Definitions
6. The following terms are used in this Standard with the
soecified:
Cash comprises cash on hand and demand deposits'
Cash equivatents are sholt-term, highly liquid investments that
readily convertible to known amounts of cash and which are subject
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
entity and other activities that are not investing or financing activities'
Investing activities are the acquisition and disposal of long-term
and other investments not included in cash equivalents'
Financingactivitiesareactivitiesthatresu|tinchangesinthesizea
comoosition of the contributed equity and borrowings of the entity'

Cash and Cash Equivalents

T.cashequiva|entsarehe|dforthepurposeofmeetingshort-termcash
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. Equity investments are excluded from
cash eouivalents unless they are, in substance, cash equivalents, e'g', in
Fund Flow and Cash Flow Statemenr

the case of preference shares acquired within a short period of their

maturity and with a specified redemption date.
8. Bank borrowings are generally considered to be financing activities.
However, where bank overdrafts which are repayable on demand form
an integral part of an entity's cash management, bank overdrafts are
included as a component of cash and cash equivalents.
A characteristic of such banking arrangements is that the bank balance
often fluctuates from being positive to overdrawn.
9. Cash flows exclude movements between items that constitute cash or
cash equivalents because these components are Dart of the cash
management of an entity rather than part of its operating, investing and
financing activities. Cash management includes the investment of excess
cash in cash eouivalents.

Presentation of a Statement of Cash Flows

10. The statement of cash flows shall report cash flows during the period
classified by operating, investing and financing activities.
11. An entity 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 entity and
the amount of its cash and cash equivalents. This information may also
be used to evaluate the relationships among those activities.
12. A single transaction may include cash flows that are classified differentlv.
For example, when the instalment paid in respect of an item of property,
Plant and Equipment acquired on deferred payment basis includes
interest, the interest element is classified under financing activities and
the loan element is classified under investinq activities.

Operating Activities
13. The amount of cash,flows arising from operating activities is a key
indicator of the extent to which the operations of the entity have
generated sufficient cash flows to repay loans, maintain the operating
capability of the entity, pay dividends and make new investments
without recourse to external sources of financing. Information about the
specific components of historical operating cash flows iq useful, in
conjunction with other information, in forecasting future op$ating cash
flows.
Cash flows from operating activities are primarily derived from the
principal reven ue-prod ucing activities of the entity. Therefore, thev
generally result from the transactions and other events that enter into
322 Accounting for

the determination of profit or loss. Examples of cash flows

operating activities are:
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
qc) cash payments to suppliers for goods and services;
[u) casfr payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance entity for premiu
and claims, annuities and other policy benefits;
(f) cash payments or refunds of income taxes unless they can
specifically identified with financing and investing activities; and
(g) cash receipts and payments from contracts held for dealing
trading purposes.
Some transactions, such as the sale of an item of plant, may give rise to
a gain or loss that is included in recognized profit or loss. The cash flows
relating to such transactions are cash flows from investing activities.
However, cash payments to manufacture or acquire assets held for rental
to others and subsequently held for sale as described in paragraph 68A
of Ind 45-16, Property, Plant and Equipment, are cash flows from
operating activities. The cash receipts from rents and subsequent sales
of such assets are also cash flows from operating activities.
15. An entity may hold securities and loans for dealing or trading purposes,
in which case they are similar to inventory acquired specifically for
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 institutions are usually classified
as operating activities since they relate to the main revenue-producing
activity of that entity.

Investing Activities
16. 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. Only expenditures that result in a recognized
asset in the balance sheet are eligible for classification as investing
activities. Examples of cash flows arising from investing activities are:
(a) cash payments to acquire property, plant and equipment, intangibles
and other long-term assets. These payments include those relating
to capitalized development costs and self-constructed property, plant
and equipment;
(b) cash receipts from sales of property, plant and equipment,
intangibles and other long-term assets;
 Fund Flow and Cash FIow Statement

(c) cash payments to acquire equity or debt instruments of other entities

and interests in joint ventures (other than payments for those
instruments considered to be cash equivalents or those held for
dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other
entities and interests in joint ventures (other than receipts for those
instruments considered to be cash equivalents and those held for
dealing or trading purposes);
(e) cash advances and loans made to other parties (other than advances
and loans made by a financial institution);
(f) cash receipts from the repayment of advances and loans made to
other parties (other than advances and loans of a financial
institution );
(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.
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
't cash flows of the position being hedged.
1
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 capital to the entity. Examples of cash flows arising from
financing activities are:
I (a) cash proceeds from issuing shares or other equity instruments;
(b) cash payments to owners to acquire or redeem the entity,s shares;
j (c) cash proceeds from issuing debentures, loans, notes,
1
bonds,
mortgages and other short-term or long-term borrowings;
(d) cash repayments of amounts borrowed; and I
I
(e) cash payments by a lessee for the reduction of the Sutstandino
liability relating to a finance lease.
t
322 Accounting for

the determination of profit or loss. Examples of cash flows

operating activities are:
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c! cash payments to suppliers for goods and services;
(dl cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance entity for
and claims, annuities and other policy benefits;
(0 cash payments or refunds of income taxes unless they can be
specifically identified with financing and investing activities; and
(g) cash receipts and payments from contracts held for dealing or
trading purposes.
Some transactions, such as the sale of an item of plant, may give rise to
a gain or loss that is included in recognized profit or loss. The cash flows
relating to such transactions are cash flows from investing activities.
However, cash payments to manufacture or acquire assets held for rental
to others and subsequently held for sale as described in paragraph 684
of Ind 45-16, Property, Plant and Equipment, are cash flows from
operating activities. The cash receipts from rents and subsequent sales
of such assets are also cash flows from operating activities.
15. An entity 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 from the purchase and sale of dealing or
trading securities are classified as operating activities. Similarly, cash
advances and loans made by financial institutions are usually classified
as operating activities since they relate to the main revenue-producing
activity of that entity.

Investing Activities
16. 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. Only expenditures that result in a recognized
asset in the balance sheet are eligible for classification as investing
activities. Examples of cash flows arising from investing adivities are:
(a) cash payments to acquire property, plant and equipment, intangibles
and other long-term assets. These payments include those relating
to capitalized development costs and self-constructed property, plant
and equipment;
(b) cash receipts from sales of property, plant and equipment,
intangibles and other long-term assets;
 Accounting for

Reporting Cash Flows from Operating Activities

18. An entity shall report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and
F gross cash payments are disclosed; or
(f tne indirect method, whereby 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' Entities are encouraged to report cash flows from operating activities
using the direct method. The direct method provides information which
may be useful in estimating future cash flows and which is not available
under 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 entity; or
(b) by adjusting sales, cost of sales (interest and similar income and
interest expense and similar charges for a financial institution) 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 investino or financing
cash flows.
20. Under the indirect method, the net cash flow from operating activities is
determined by adjusting 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,
unrealized foreign currency gains and losses and undistributed
profits of associates; 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 revenues and
expenses disclosed in the statement of profit and loss, and the changes
during the period in inventories, operating receivables and payables.

Reporting Cash Flows from Investing and Financing Activities

21. An entity shall report separately major classes of gross cash receipts and
gross cash payments arising from investing and . financing activities,
 Fund Flow and Cash Flow Statemenr

except to the extent that cash flows described in paragraphs 22 and 24

are reoorted 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
entity; 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)

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

(b) funds held for customers by an investment entity; and
(c) rents collected on behalf of, and paid over to, the owners of
properties.
23A. Examples of cash receipts and payments referred to in paragraph 22(b)
are advances made for, and the repayment 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
institution may be repoded 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 institutions; and
(c) cash advances and loans made to customers and the repayment of
those advances and loans.

Foreign Currency Cash Flows

t1
25. Cash flows arising from transactions in a foreign curretcy shall be
recorded in an entity's functional currency by applying to!the foreign
currency amount the exchange rate between the functional currency and
the foreign currency at the date of the cash flow.
26. The cash flows of a foreign subsidiary shall be translated at the exchange
d rates between the functional currencv and the foreion currencv at the
;l
dates of the cash flows.
326 Accounting for

27. Cash flows denominated in a foreign currency are reported in a

consistent with Ind AS-21, The Effects of Changes in Foreign Ex
Rates. This permits the use of an exchange rate that approximates
actual rate. For example, a weighted average exchange rate for a
_may be used for recording foreign currency transactions or t
\,translation
l- of the cash flows of a foreign subsidiary. However, Ind AS-
toes not permit use of the exchange rate at the end of the reporti
period when translating the cash flows of a foreign subsidiary.
28. Unrealized gains and losses arising from changes in foreign cu
exchange rates are not cash flows. However, the effect of exchanqe
changes on cash and cash equivalents held or due in a foreion
is reported in the statement of cash flows in order to reconcile cash
cash equivalents at the beginning and the end of the period.
29. This amount is presented separately from cash flows from operati
investing and financing activities and includes the differences, if any,
those cash flows been repofted at end of period exchange rates.
30. [Refer Appendix 1]
Interest and Dividends
31. Cash flows from interest and dividends received and paid shall each be
disclosed separately. Cash flows arising from interest paid, and interest
and dividends received in the case of a financial institution should be
classified as cash flows arising from operating activities. In the case of
other entities, 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 from financing activities.
32. The total amount of interest paid during a period is disclosed in the
statement of cash flows whether it has been recognized as an expense in
profit or loss or capitalized in accordance with Ind AS-23, Borrowing
Costs.
33. Interest paid and interest and dividends received are usually classified as
operating cash flows for a financial institution. However, there is no
consensus on the classification of these cash flows for other entities.
Some argue that interest paid and interest and dividends received may
be classified operating cash flows because they enter into the
determination of 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 costs of obtaining financial resources or returns on investments.
34. Some argue that dividends paid may be classified as a component of
cash flows from operating activities in order to assist users to determine
Fund Flow and Cash Flow Statemenr

the ability of an entity 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
35. Cash flows arising from taxes on income shall be separately disclosed
and shall be classified as cash flows from operating activities unless they
can be specifically identified with financing and investing activities.
36. Taxes on income arise on transactions that give rise to cash flows that
are classified as operating, investing or financing activities in a statement
of cash flows. While tax expense may be readily identifiable with
investing or financrng 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 transaction. 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 which are classified as investing
or financing activities, the tax cash flow is classified as an investing or
financing activity as appropriate. When tax cash flows are allocated over
more than one class of activity, the total amount of taxes paid is
disclosed.

Investments in Subsidiaries, Associates and foint Ventures

37. When accounting for an investment in an associate, a joint venture or a
subsidiary accounted for by use of the equity or cost method, an investor
restricts its reporting in the statement of cash flows to the cash flows
between itself and the investee, for example, to dividends and advances.
38. An entity that reports its interest in an associate or a joint venture using
the equity method includes in its statement of cash flows the cash flows
in respect of its investments in the associate or joint venture, and
distributions and other payments or receipts between it and the
associate or ioint venture.

Changes in Ownership Interests in Subsidiaries and Other Businesses

39. The aggregate cash flows arising from obtaining or losing.control of
subsidiaries or other businesses shall be presented sepa'rrately and
classified as investing activities.
40. An entity shall disclose, in aggregate, in respect of both obtaining and
losing control of subsidiaries or other businesses during the period each
of the following:
(a) the total consideration paid or received;
 ite Accounting for

(b) the portion of the consideration consistino of cash and

equivalents;
(c) the amount of cash and cash equivalents in the subsidiaries or
businesses over which control is obtained or lost; ano
(d)qthe amount of the assets and liabilities other than cash or
lequivalents in the subsidiaries or other businesses over which c
is obtained or lost, summarised by each major category.
40A. An investment entity, as defined in Ind AS-110, Consolidated
Statements, need not apply paragraphs 40(c) or 40(d) to an in
in a subsidiary that is required to be measured at fair value th
profit or loss.
41. The separate presentation of the cash flow effects of obtaining or
control of subsidiaries or other businesses as sinqle line items.
with the separate disclosure of the amounts of assets and liabi
acquired or disposed of, helps to distinguish those cash flows from
cash flows arising from the other operating, investing and financi
activities. The cash flow effects of losing control are not deducted from
those of obtaining control.
42. The aggregate amount of the cash paid or received as consideration for
obtaining or losing control of subsidiaries or other businesses is reDorteo
in the statement of cash flows net of cash and cash equivalents acquired
or disposed of as part of such transactions, events or changes in
circumstances.
42A. Cash flows arising from changes in ownership interests in a subsidiary
that do not result in a loss of control shall be classified as cash flows
from financing activities, unless the subsidiary is held by an investment
entity, as defined in Ind AS-110, and is required to be measured at fair
value through profit or loss.
428. Changes in ownership interests in a subsidiary that do not result in a loss
of control, such as the subsequent purchase or sale by a parent of a
subsidiary's equity instruments, are accounted for as equity transactions
(see Ind AS-110), unless the subsidiary is held by an investment entity
and is required to be measured at fair value through profit or loss.
Accordingly. the resulting cash flows are classified in the same way as
other transactions with owners described in paragraph 17.

Non-cash Transactions
43. Investing and financing transactions that do not require the use of cash
or cash equivalents shall be excluded from a statement of cash flows.
Such transactions shall be disclosed elsewhere in the financial
statements in a way that provides all the relevant information about
these investing and financing activities.
 Fund Flow and Cash Flow Statement

sn 44. 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 entitv. The exclusion of non-cash transactions from the statement
of cash flows is consistent with the objective of a statement of cash flows
as these items do not involve cash flows in the current Deriod.
sn
Examoles of non-cash transactions are:
ol
(a) the acquisition of assets either by assuming directly related liabilities
or by means of a finance lease;
ial
nt (b) the acquisition of an entity by means of an equity issue; and
;h (c) the conversion of debt to equity.

1g
Components of Cash and Cash Equivalents
er 45. An entity shall disclose the components of cash and cash equivalents and
_is shall present a reconciliation of the amounts in its statement of cash
1e flows with the equivalent items reported in the balance sheet.
rg 46. In view of the variety of cash management practices and banking
m arrangements around the world and in order to comply with Ind AS-1,
Presentation of Financial Statements, an entity discloses the policy which
cr it adopts in determining the composition of cash and cash equivalents.
ral
47. The effect of any change in the policy for determining components of
cash and cash equivalents, for example, a change in the classification of
tn financial instruments previously considered to be part of an entity's
investment portfolio is reported in accordance with Ind AS-8, Accounting
Policies, Changes in Accounting Estimates and Errors.
/s
'It Other Disclosures
tr
48. An entity shall disclose, together with a commentary by management,
the amount of significant cash and cash equivalent balances held by the
entity that are not available for use by the group.l
a
49. There are various circumstances in which cash and cash eouivalent
'.Y
balances held by an entity are not available for use by the group.2
Examples include cash and cash equivalent balances held by a subsidiary
that operates in a country where exchange controls or other legal
restrictions apply when the balances are not available for general use by
the Darent or other subsidiaries.
50. Additional information may be relevant to users in undQrstanding the
financial position and liquidity of an entity. Disclosure of thiS information,
h

tl
1. The requirements shall be equally applicable to the entities in case of separate
rt financia I statements also
2. rbid.
330 Accounting for

together with a commentary by management, is encouraged and

include:
(a) the amount of undrawn borrowing facilities that may be available
future operating activities and to settle capital comm
indicating any restrictions on the use of these facilities;
(b I Refer Appendix 1]
(c) the aggregate amount of cash flows that represent increases
operating capacity separately from those cash flows that
required to maintain operating capacity; and
(d) the amount of the cash flows arising from the operating, i
and financing activities of each reportable segment (see Ind AS-1
Operating Segments).
51. The separate disclosure of cash flows that represent increases
operating capacity and cash flows that are required to maintain
capacity is useful in enabling the user to determine whether the entity
investing adequately in the maintenance of its operating capacity.
entity that does not invest adequately in the maintenance of
operating capacity may be prejudicing futu re profitability for the sake
current liquidity and distributions to owners.
52. The disclosure of segmental cash flows enables users to obtain a
understanding of the relationship between the cash flows of the busi
as a whole and those of its component parts and the availability a
variability of segmental cash flows.

Appendix 1

Note: This Appendix is not a part of the Indian Accounting Standard. The
purpose of this Appendix is only to bring out the major differences, if any,
between Indian Accounting Standard (Ind AS) - 7 and the corresponding
International Accounting Standard (IAS) 7, Statement of Cash F/ows, issued by
the International Accounting Standards Board.
Comparison with IAS 7, Statement of Cash Flows
Ind AS-7 differs from International Accounting Standard (IAS) 7, Statement
of Cash Flows, in the following major respects:
1. In case of other than financial entities, IAS 7 gives an option to classify
the interest paid and interest and dividends received as item of operating
cash flows. Ind AS-7 does not provide such an option and requires these
item to be classified as item of financing activity and investing activity,
respectively (refer to the paragraph 33).
Fund Flow and Cash Flow Statement

2. IAS 7 gives an option to classify the dividend paid as an item of

operating activity. However, Ind AS-7 requires it to be classified as a
part of financing activity only (refer paragraph 34).
3. Different Terminology is used in this standard. for example, the term
'Balance sheet' is used instead of 'statement of Financial position, and
'Statement of Profit and Loss' is used instead of .statement of
Comprehensive Income',
4. Paragraph 2 of IAS 7 which states that IAS 7 supersedes the earlier
version IAS 7 is deleted in Ind AS-7 as this is not relevant in Ind AS-7.
However, paragraph number 2 is retained in Ind AS-7 to maintain
consistency with paragraph numbers of IAS 7.
5. The following paragraph numbers appear as.Deleted, in IAS 7. In order
to maintain consistency with paragraph numbers of IAS 7, the paragraph
numbers are retained in Ind AS-7:
(i) paragraph 29
( ii) paragraph 30

( iii) paragraph 50(b)

il:il:fl

t?