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Accounting Standard 3 (Revised)

Accounting Standard 3 was originally issued in June 1981, under the


title of Statement of changes in Financial Position. This was later
superseded by a revised statement titled Cash Flow Statement
which was issued in March 1997.
Now what is Cash Flow Statement?
The Answer is Cash Flow Statement is the brief summary of cash
receipts and cash payments with an objective to reconcile the opening
and closing cash, bank and cash equivalents balances. In short,
Cash Flow Statement is a brief of Cash book.
The term Cash Equivalent refers to those highly liquid assets which
can be easily converted into cash at any point of time For Example:
Government Securities, Treasury bill, Gold Bonds etc.
Accounting Standard 3 (Revised) compulsate every enterprise should
prepare a Cash Flow Statement for each accounting period.
Cash Flow Statement comprise of three Activities:
A. Operating Activity
B. Investing Activity
C. Financing Activity

A. Operating Activity:
Operating Cash Flow is a key indicator to judge the ability of the
enterprise to maintain its operating capability, pay dividends repay
loans and Make new investments without recourse to external sources
of financing. Cash Flow from operating Activity is determined from
the principal revenue producing activity of the business entity. For
Example:
a) Cash receipts from the sale of goods and services.

b) Cash receipts from royalty, fees, commissions etc. (Indirect


Income)
c) Cash payments to suppliers
\ Besides above all the expenses in the cost sheet of the business
entity are operating costs. It consists of:
I.
II.
III.
IV.

Prime Cost
Factory Overhead
Office and Administrative Overhead
Selling and Distribution Overhead

Determining Net Cash Flow from Operating Activities:


Starting with Net Profit, we eliminate the effect of revenue not
received and expenses not paid in order to arrive at net cash flow
from operating activities. (Explained in the Flow Chart below)

Actual Basis

Cash Basis

(Accrual/Due Basis)

Earned

Eliminate Revenue
not earned in cash

Revenue

Net cash flow from


Operating Activities

Net Profit

Incurred
Expenses

B. Investing Activities:

Eliminate Expenses
not paid in cash

Investing Activities involve purchases and sales of Fixed Assets and


Long-Term as well as Short-Term Investments. Cash receipts and cash
payments from Investing Activities are computed by analysing
changes in the two balances viz. Opening and Closing balances of
Fixed Assets and Investments and considering the cash effects of
related transactions that took place during the period.
Interest and Dividend received are also part of cash inflows from
Investing Activity.

C. Financing Activities:
The final and last activity considered in preparation of cash flow
statement is determining cash flows from financing activity which
involve raising and repayment of capital and loans (outsiders long
term liabilities).
Interest paid and Dividend paid is also a part of cash outflows from
financing activity.

Concluding Cash Flow Statement


We now put together the result of the above three activities viz.
Operating, Investing, Financing Activities with the opening Balances
of cash and cash equivalents. The result we thus get is the closing
balance of cash and cash equivalents put together.