CASH FLOW STATEMENTS-

CFS
AS- 3
CA (Dr.) Reena Desai
 AS -3 issued by ICAI governs Cash Flow
Statements.
 As per AS-3 it should be used by listed
companies and large concerns.
 SEBI has made it compulsory for listed
companies to attach the CFS to their Annual
Reports.
Introduction
 CFS shows and summarise changes in the
cash balance for a particular period.
 Concentrates only on movements of cash
indicating the sources from which cash is
obtained and where it is used.
 Balance sheet shows only opening and closing
balances of cash, it doesn’t show details of
cash payment and receipts. This drawback is
overcome by CFS.
 Usual profit and loss account shows ‘Book
Profit ‘ and not ‘Cash Profit’ as it considers non
cash expenses e.g. Depreciation, writing off
goodwill, transfer to reserve etc. These non
cash expenses have to be adjusted to arrive at
cash profit which becomes the main source of
cash inflow.
 The difference between Cash inflow and Cash
outflow is known as Net Cash Flow.
Cash and Cash Equivalents
 As per AS- 3 CFS deals with outflow and inflow
of cash and cash equivalents.
 Cash- Cash balance , Bank balance (current
and Savings)
 Cash equivalents: Short term, highly liquid
investments that are readily converted into
cash e.g. Bank FD for 1 month, money market
instruments, treasury bills etc.
Cont…
 AS-3 requires that CFS should disclose the
components of C &CE and their recociliation
with the amount shown in the balance sheet.
 Thus CFS shows receipt and payments
through Cash/ Bank/ Short term investments.
 Contra transaction / entries will not affect cash
inflow and outflow. e.g. Depositing cash into
bank, or selling short term investments.
Classification of CF
Arising out of
1) Operating Activity
Purchase and Sale of goods / services
2) Investing Activity
Purchase and sale of FA/ Investments
3) Financing Activity
Fresh issue of Shares , debentures, loans
Repayments w.r.t. shares, debentures , loans
Cash from Operating Activities
 Inflows
Sale of goods
Rendering services
Royalties, fees , commission etc.
Refund of Income tax
 Outflows
Payments to suppliers for goods/ services
To employees
Income Tax ( except taxes arising out of investing
and financing activities)
Cash from Investing Activities
 Inflow:
Sale of FA/ Intangible assets
Sale of Investments
Repayments received against the advances and
loans given to outsiders
Interest and Dividend received
 Outflow:

Purchase of FA/Intangible Assets/ Inv.

Advance and loans given to outsiders
Cash from Financing Activity
 Inflow:
Issue of Shares
Issue of debentures/ bonds
Raising loans
Other Long Term Borrowings.
 Outflow:

Repayment of loans taken

Redemption of shares / deb.
Interest / dividend paid
Non Cash Transaction
Investing and financing transactions that do not
require the use of cash should be excluded from
CFS
e.g. Purchase of asset by directly assuming
concerned liabilities
Purchase of business concern by means of
issue of shares.
Conversion of debt into Equity
CFS
Particulars ₹ ₹
1 CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from Operations
Income tax paid
Extra ordinary income / Expenses
2
Net Cash from Operating Activities
CASH FROM INVESTING ACTIVITIES
Sale of fixed Assets/ Investments
Purchase of Fixed Assets/ Investments
Interest received
Dividend received
Net Cash from Investing Activities
3
CASH FROM FINANCING ACTIVITIES
Issue of shares
Issue of debentures/bonds
Received from fresh loans
Shares / debentures redeemed
Cash generated from Operations

Accounts kept on accrual basis are converted

into cash basis. Net profit is converted into cash
profit.
Three things to be Adjusted
EXCLUDE:
NON CASH ITEMS
NON OPERATING CASH FLOWS
ACCRUALS
Example
Example: Sales 2,00,000
Less: Purchases- 70,000
Wages- 30,000
Admn. Exp- 20,000
Selling Expenses- 30,000/ 1,50,000
NP= 50,000
If there is no credit transactions, NP= Cash profit
Assuming Debtors ( Credit Sales) = 25% ; Creditors – 20,000;
Outstanding Wages- 10,000

Cash Profit by - Direct Method:

Sales 1,50,000
Less: purchases – 50,000 ; Wages 20,000;Admin & selling 50,000
Cash profit= 30,000
 Indirect Method
 Indirect Method Formula:
NP as per P&L Acccount
+ Decrease in Receivables
+ Increase in Payables
- Increase in Receivables

- Decrease in Payables

= Cash Profit
 Indirect Method:
Net Profit = 50,000
Add: Increase in creditors= 20,000
Increase in o/s exp= 10,000
Less: Increase in Debtors= (50,000)

_____________
Cash Profit 30,000
Direct Method Format
1. Cash Receipts from Customers
2. Cash paid to suppliers
3. Cash paid to employees
4. Cash generated from operations (1-2-3)