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ACCOUNTING STANDARD ʹ 3
[AS ʹ 3 (REVISED)]
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` Introduction
` Meaning of cash flow and cash flow statement
` Objectives of CFS
` USES
` Limitations
` Important definitions as per AS ʹ 3 (revised)
` Classification of Cash Flows
Operating Activities
 Investing Activities
 Financing Activities
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`Cash flow statement is additional information to user
of financial statement

`This statement exhibits the flow of incoming and

outgoing cash

`This statement assesses the ability of the enterprise

to generate cash and cash equivalents

`It also assesses the needs of the enterprise to utilise

the cash and cash equivalents generated

`It also assesses the liquidity and solvency of the

enterprise
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`CASH FLOW
`CASH FLOW STATEMENT
 Õ

`To ascertain the sources from activities

`To ascertain the uses by activities

`To ascertain the net cash

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`Short-Term Planning
`The Cash Flow helps understand Liquidity and
Solvency
`Efficient Cash Management
`Comparative Study
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` Accounting personnel, who need to know whether
the organization will be able to cover payroll and
other immediate expenses
` Potential a
  or  , who want a clear
picture of a company's ability to repay
` Potential 
, who need to judge whether
the company is financially sound
` Potential employees or contractors, who need to
know whether the company will be able to afford
compensation
` 6
 a  of the business.
 Õ
`Non-cash transactions are ignored
`Not a substitute for an Income
statement
`Historical in nature
`Ignores basic accounting concept
i.e. accrual concept
 Õ Õ


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è Held for meeting short term commitments

è It is readily convertible into known

amounts of cash

è It has a very insignificant risk

è Short maturity (say 3 months maximum)

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The Accounting Standard-3 (Revised) in Para 7 states that cash
flows exclude movement 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.
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‰ Cash withdrawn from bank for business.
‰ Cash deposited into bank out of cash in hand.
‰ Sale/ purchase of short-term marketable securities being cash
equivalents.
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 (i) OPERATING ACTIVITIES
[ These are principal revenue producing activities of
the enterprise
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èCash receipts from the sale of goods and rendering
services.
è Cash receipts from royalties, fees, commission and
other revenue.
è Cash payments to suppliers of goods and services.
è Cash payments to and on behalf of
employees for wages, etc.
 (ii) INVESTING ACTIVITIES
[ The activities of acquisition and disposal of
long term assets and other investments not
included in cash equivalent are investing
activities.
[ It includes making and collecting loans,
acquiring and disposal of debt and equity
instruments, property and fixed assets etc
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èCash receipts from sale of fixed assets
è Cash receipts from interest
è Cash payments to purchase shares
è Cash payments to purchase of fixed assets
 (iii) FINANCING ACTIVITIES
[ Those activities that result in changes in size and
composition of owners capital and borrowing of the
organization.
[ It includes receipts from issuing shares, debentures,
bonds, borrowing and payment of borrowed amount,
loan etc.
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èCash proceeds from the issue of shares
è Cash proceeds from the issue of debentures
è Buy-back of equity shares
è Payments of dividends