AS-3 – Cash Flow Statements :
Accounting Standard-3 recommends that listed companies and other industrial commercial and business enterprises will have to provide to their shareholders and public in general, as the case may be, a cash flow statement along with balance sheet and income statement. Cash flow statement provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. The standard lays down the procedures and guidelines for the preparation and presentation of cash flow statements. It states that the statement should report cash flows during the period classified by operating, investing and financing activities. Cash flows from operating activities may be reported using either (a) direct method whereby major classes of gross cash receipts and gross cash payments are disclosed; or (b) 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 expenses associated with investing or financing cash flows. An enterprise should report separately major classes of gross receipts and gross payments arising from investing and financing activities except for certain cash flows which may be reported on a net basis. 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, (b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short. Cash flows arising from each of the following activities of a financial enterprise may also 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.
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 foreign currency at the date of the cash flow. The cash flows associated with extra ordinary item should be classified as arising from operating, investing and financing activities as appropriate and separately disclosed. This treatment would enable the users to understand their nature and effect on the present and future cash flows of the enterprise. Cash flows from interest and dividends received and paid should each be disclosed separately. Cash flows arising from taxes and 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. Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from the 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. An enterprise needs to 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.