INDIAN ACCOUNTING STANDARD 79 4.

81

UNIT 3:
INDIAN ACCOUNTING STANDARD 7: STATEMENT OF
CASH FLOWS

LEARNING OUTCOMES
After studying this unit, you will be able to:
 Understand the meaning of cash flow statement
 Describe the objective and scope of issuance of Ind AS 7
 Define the relevant terms used in the Ind AS
 Classify the types of cash flows into operating, investing and financing
activities
 Distinguish between direct and indirect method of presentation of cash
flows under the operating activity
 Identify the provision applicable to various peculiar situations of cash
flows
 Disclose the necessary information as required in the standard.
 Differentiate between Ind AS 7 and AS 3

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UNIT OVERVIEW

• Objectives
• Scope
• Benefits
Ind AS 7 • Definitions

• Operating Cash Flows

• Investing Cash Flows
Presentation of
Statement of • Financing Cash Flows
Cash Flows

• Direct Method
Method of • Indirect Method
Presentation

• Reporting on a net basis

• Foreign Currency Transactions
• Interest and Dividend
• Taxes on Income
Peculiar Cases • Investments in Subsidiaries, associates and Joint ventures
of Cash flows • Changes in ownerships Interests in subsidiaries and other businesses
• Non Cash Transactions

• Components of cash and cash equivalents

• Other Disclosures
Discosure

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3.1 INTRODUCTION
The balance sheet is a snapshot of entity’s financial resources and obligations at a particular point
of time and the statement of profit and loss reflects the financial performance for the period. These
two components of financial statements are based on accrual basis of accounting. The statement of
cash flows includes only inflows and outflows of cash and cash equivalents; it excludes transactions
that do not affect cash receipts and payments.
The information on cash flows is useful in assessing sources of generating and deploying cash and
cash equivalents during the reporting period. The statement of cash flows can be used for
comparison with earlier reporting periods of the same entity as well as comparison with other entities
for the same reporting period.
Ind AS 7, Statement of Cash Flows, prescribes principles and guidance on preparation and
presentation of cash flows of an entity from operating activities, investing activities and financing
activities for a reporting period.

3.2 MEANING OF STATEMENT OF CASH FLOWS

Cash flow statement, in simple words is a statement, which provides the details about how the cash
is generated by an entity during the particular reporting period and how it is applied. While doing so,
it takes into consideration the opening balances of cash and cash equivalents, adds the cash
generated, deducts the cash payments and reconciles it with closing balances of cash and cash
equivalents. The cash flows are classified into following three main categories:
(a) Cash flows from Operating Activities
(b) Cash flows from Investing Activities
(c) Cash flows from Financing Activities

From Operating
Activities

From Investing From Financing

Activities Activities

Cash Flows

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The simplified example of cash flow statement, for understanding purpose is given below

Particulars Amount (` )
Cash flow from Operations Activities 10,000
Cash flow from Investing Activities (2,000)
Cash flow from Financing Activities (4,000)
Net Cash Generated during the year 4,000
Add: Cash and Cash Equivalents at the beginning of the year 13,000
Cash and Cash Equivalents at the end of the year (which will also tally with
the cash and cash equivalents given in the balance sheet) 17,000
Thus, one can see that at the beginning of the year, the opening balance of cash and cash
equivalent was ` 13,000. During the year, the business generated (inflow) cash from its main
operations ` 10,000. Thus, the entity had ` 23,000 at its disposal. Out of it, the entity has used
(outflow) ` 2,000 for additional investments and ` 4,000 for financing activities. Therefore, at the
end of the year, the entity is left with the balance of ` 17,000.

3.3 OBJECTIVE
Ind AS 7, has specified the following objectives of Statement of Cash Flows:
3.3.1 To provide information about historical changes in cash and cash
equivalents
Cash flow statement aims at providing the information about how the cash has been generated
during the year and for what purposes has it been utilised. The information will be provided for
current year and immediate previous year.
3.3.2 To assess the ability to generate cash and cash equivalents
Cash flow statement is intended to provide the stakeholders about the efficiency of the company in
generating cash and cash equivalents. Some companies may look profitable as per profit and loss
account but whether they have enough cash for payment of their debts and creditors has to be
assessed by using cash flow statement.
3.3.3 To understand the timing and certainty of their generation
The historical analysis of statement of cash flow can set a trend regarding the years in which
company could generate fair amount of cash flows and the probability of generating it.

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3.4 BENEFITS OF CASH FLOW STATEMENT

3.4.1 Provides information enabling evaluation of changes in net assets
and financial structure (Liquidity and solvency)
Cash flow statement reconciles the opening balances of cash and cash equivalents with the closing
balances of cash and cash equivalents, giving the reasons for the changes happened during the
year. Thus it provides a clear picture of cash inflows and out flows that have taken place during the
reporting period.
3.4.2 Assesses the ability to manage the cash
The stakeholders get an idea about what is the source of generation of cash and how it is used for.
The information gives a fair idea about the efficiency and ability of the company to generate cash.
For example, suppose there is negative cash flow from operations. It denotes that company is
unable to generate cash from its main business activity, which is not a favourable situation.
Cash flow statements can also throw light on whether company could generate sufficient cash or not.
For example, company wants to expand its production capacity. The cash flow statement can
indicate whether company could generate the required cash from their operations, or whether
company has generated the funds from share capital or whether company has taken a loan for the
same.

3.4.3 Assess and compare the present value of future cash flows
The past trends of cash flows will help the company to predict about future cash flows. Such
information is useful while evaluating the projects on capital budgeting or valuation of shares. Thus
it forms the base for future projects and can be discounted using discounting techniques.
3.4.4 Compares the efficiency of different entities
Accounting profits of various entities may have different assumptions, policies and definitions.
However, cash flows will be calculated by using the same technique and finally all differing
assumptions across the companies will melt down and entity will reach to a common comparable
base of cash and cash equivalents.

3.5 SCOPE
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 period for which
financial statements are presented.

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The Standard requires all entities to present a statement of cash flows.

Every organisation, whether it is small or big in size, whether it’s a manufacturing organisation or
trading concern or service organisation, needs cash for running its business. The cash is also
needed for future investments. Cash would be needed for payment of dividends, repayment of loans
as well. Thus any organisation is required to generate the cash and utilises cash continuously.
Banks and Financial institutions are also not an exception to the same. Even if they deal with
financial products, accept deposits and give loans day in and day out, they need to generate the
cash profit for their own organisation. They need to make investments in terms of new branches, set
ups etc. Thus statement of cash flow is equally important for Banking and Financial Institutions as
well.

3.6 DEFINITIONS
The following terms are used in this Standard with the meanings specified:
1. Cash comprises cash on hand and demand deposits.
2. Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.
5. Investing activities are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.
6. Financing activities are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity.

3.7 CASH AND CASH EQUIVALENTS

Cash Equivalent means investments which can be realised easily in cash in a short period from the
date of investing the same.
1. Purpose: Cash equivalents are held for the purpose of meeting short-term cash commitments
rather than for investment or other purposes.
2. Liquidity and Risk : 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.

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3. Equity investments are excluded from cash equivalents unless they are, in substance, cash
equivalents.
For example, preference shares acquired within a short period of their maturity and with a
specified redemption date.
4. 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.
5. Cash Management : Cash flows exclude movements between items that constitute cash or
cash equivalents because these components are part 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 equivalents.
Illustration 1
Company has provided the following information regarding the various assets held by company
on 31st March 20X1. Find out, which of the following items will be part of cash and cash
equivalents for the purpose of preparation of cash flow statement as per the guidance provided
in Ind AS 7:
Sr. Name of the Security Additional Information
No.
1. Government Bonds 5%, open ended, main purpose was to park the
excess funds for temporary period
2. Fixed deposit with SBI 12%, 3 years maturity on 1st Jan 20X4
3. Fixed deposit with HDFC 10%, original term was for 2 years, but due for
maturity on 30.06.20X1
4. Redeemable Preference shares The redemption is due on 30 th April 20X1
in ABC ltd
5. Cash balances at various banks All branches of all banks in India
6. Cash balances at various banks All international branches of Indian banks
7. Cash balances at various banks Branches of foreign banks outside India
8. Bank overdraft of SBI Fort Temporary overdraft, which is payable on demand
branch
9. Treasury Bills 90 days maturity

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Solution

Sr. No. Name of the Security Decision

1. Government Bonds Included as intention is not to hold long term
2. Fixed deposit with SBI Not to be considered – long term
3. Fixed deposit with HDFC Exclude as original maturity is less than 90 days
from the date of acquisition
4. Redeemable Preference shares in Include as due within 90 days from the date of
ABC Ltd. acquisition
5. Cash balances at various banks Include
6. Cash balances at various banks Include
7. Cash balances at various banks Include
8. Bank overdraft of SBI Fort branch Include
9. Treasury Bills Include
*****

3.8 PRESENTATION OF STATEMENT OF CASH FLOWS

The statement of cash flows shall report cash flows during the period classified by operating,
investing and financing activities.

Activities

Operating Investing Financing

Principal revenue- Activities that result in the Activities that result in

producing activities of the acquisition and disposal of changes in the size and
entity and other activities long-term assets and other composition of the
that are not investing or investments not included in contributed equity and
financing activities cash equivalents borrowings of the entity

3.8.1 Operating Activities

• Cash flows from operating activities are primarily derived from the principal revenue producing
activities of the entity ie from operations of the business. Therefore, they are, in general, the
result of the transactions and events that enter into the determination of profit or loss.
Examples of cash flows from operating activities are:

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Operating Cash Inflows Operating Cash Outflows

Cash receipts from the sale of goods and Cash payments to suppliers for goods and
the rendering of services services
Cash receipts from royalties, fee, Cash payments to and on behalf of
commission and other revenue employees
Cash receipts and cash payments of an Cash payments or refunds of income taxes
insurance entity for premiums and claims, unless they can be specifically identified with
annuities and other policy benefits financing and investing activities
Cash receipts and payments from
contracts held for dealing or trading
purposes

Illustration 2
From the following transactions, identify which transactions will be qualified for the calculation of
operating cash flows, if company is into the business of trading of mobile phones
Sr. No. Nature of Transaction
1 Receipt from sale of mobile phones
2 Purchases of mobile phones from various companies
3 Employees expenses paid
4 Advertisement expenses paid
5 Credit sales of mobile
6 Misc. charges received from customers for repairs of mobiles
7 Warranty claims received from the companies
8 Loss due to decrease in market value of the closing stock of old mobile phones
9 Payment to suppliers of mobile phones
10 Depreciation on furniture of sales showrooms
11 Interest paid on cash credit facility of the bank
12 Profit on sale of old computers and printers, in exchange of new laptop and printer
13 Advance received from customers
14 Sales Tax and excise duty paid
15 Proposed dividend for the current financial year

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Solution
Sr. Nature of Transaction Included / Excluded with reason
No.
1 Receipt from sale of mobile phones Include – main revenue generating activity
2 Purchases of mobile phones from Include – expenses related to main
various companies operations of business
3 Employees expenses paid Include – expenses related to main
operations of business
4 Advertisement expenses paid Include – expenses related to main
operations of business
5 Credit sales of mobile Do not include – Credit transaction will not
be included in cash flow (receipts from
customers will be included)
6 Misc. charges received from customers Include – supplementary revenue
for repairs of mobiles generating activity
7 Warranty claims received from the Include – supplementary revenue
companies generating activity
8 Loss due to decrease in market value of Do not include - Non cash transaction
the closing stock of old mobile phones
9 Payment to suppliers of mobile phones Include – cash outflow related to main
operations of business
10 Depreciation on furniture of sales Do not include – non cash item
showrooms
11 Interest paid on cash credit facility of the Do not include – cost of finance
bank
12 Profit on sale of old computers and Do not include – non cash item
printers, in exchange of new laptop and
printer
13 Advance received from customers Include – Related to operations of business
14 Sales tax and excise duty paid Include – related to operations of business
15 Proposed dividend for the current Do not include – cost of finance
financial year
• 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 or not. If the cash flow
from operations is positive, it will be treated as positive indicator whereas negative cash flow
from operations will denote that company’s ability to generate the revenue from its main

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operations is very weak. The companies in the initial stage of their business or the companies
which are facing economic problems will generally have the negative cash flow from operations.
• Cash flow from operations are used to maintain the operating capability of the entity, pay
dividends and make new investments without recourse to external sources of financing.
Therefore, it is necessary to assess how much cash is generated by the business from
operations? Are they sufficient to take care of their future investment plans? Can loans be
repaid in time without default from such cash flows? Is there sufficient amount for payme nt of
preference dividend? Is anything left for equity shareholders after making all these payments?
Answers to all these questions will depend on whether the entity has generated enough cash
or not.
[Link] Certain Specific Issues
1. Profit / Loss on Sale of Assets : Some transactions, such as the sale of an item of plant, may
give rise to a gain or loss that is included in recognised profit or loss. The cash flows relating
to such transactions are cash flows from investing activities.
2. Properties built for let out : Cash payments to manufacture or acquire assets held for rental
to others and subsequently held for sale are cash flows from operating activities. The cash
receipts from rents and subsequent sales of such assets are also cash flows from operating
activities.
3. Operations of Financial companies and Banks : 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.
3.8.2 Investing Activity
Investment means sacrifice of current resource in a view to get more returns in future. All entities
need some amount of investment for their future survival.
Ind AS 7 states that investing activities 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 acti vities.
Examples of cash flows arising from investing activities are:

Cash Inflow from Investing Activities Cash Outflow from Investing Activities
Cash receipts from sales of property, plant and Cash payments to acquire property, plant and
equipment, intangibles and other long-term equipment, intangibles and other long-term
assets assets. These payments include those relating

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to capitalised development costs and self-

constructed property, plant and equipment
Cash receipts from sales of equity or debt Cash payments to acquire equity or debt
instruments of other entities and interests in instruments of other entities and interests in
joint ventures (other than receipts for those joint ventures (other than payments for those
instruments considered to be cash equivalents instruments considered to be cash equivalents
and those held for dealing or trading purposes) or those held for dealing or trading purposes);
Cash receipts from the repayment of advances Cash advances and loans made to other parties
and loans made to other parties (other than (other than advances and loans made by a
advances and loans of a financial institution) financial institution)
Cash receipts from futures contracts, forward Cash payments for futures contracts, forward
contracts, option contracts and swap contracts contracts, option contracts and swap contracts
except when the contracts are held for dealing except when the contracts are held for dealing
or trading purposes, or the receipts are or trading purposes, or the payments are
classified as financing activities 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 cash flows of the position being hedged.
Illustration 3
From the following transactions taken from a private sector bank operating in India, identify which
transactions will be classified as operating and which would be classified as Investing activity.

S. No. Nature of transaction paid

1 Interest received on loans
2 Interest paid on Deposits
3 Deposits accepted
4 Loans given to customers
5 Loans repaid by the customers
6 Deposits repaid
7 Commission received
8 Lease rentals paid for various branches
9 Service tax paid
10 Furniture purchased for new branches
11 Implementation of upgraded banking software
12 Purchase of shares in 100% subsidiary for opening a branch in Abu Dhabi

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13 New cars purchased from Honda dealer, in exchange of old cars

14 Provident fund paid for the employees
15 Issued employee stock options

Solution
Sr. Nature of transaction paid Operating / Investing / Not to be considered
No.
1 Interest received on loans Operating – Main revenue generating activity
2 Interest paid on Deposits Operating – Main expenses of operations
3 Deposits accepted Exclude – financing activity
4 Loans given to customers Operating – in case of financial institutes
5 Loans repaid by the customers Operating – in case of financial institutes
6 Deposits repaid Exclude – Financing activity
7 Commission received Operating – Main revenue generating activity
8 Lease rentals paid for various Operating – Main expenses of operations
branches
9 Service tax paid Operating – Main expenses of operations
10 Furniture for new branches Investing – Assets purchased
11 Implementation of upgraded Investing – Purchased for long term purpose
banking software
12 Purchase of shares in 100% Investing – strategic investment
subsidiary for opening a branch in
Abu Dhabi
13 New cars purchased from Honda Investing
dealer, in exchange of old cars
14 Provident fund paid for the Operating
employees
15 Issued employee stock options Not to be considered. No cash flow
*****

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3.8.3 Financing Activity

During the life time of the entity, it needs money for long term investments as well as for working
capital purpose. Company can raise the capital by way of equity or loans. Thus the cash flows related
to raising of funds and redemption of funds will be covered under Cash flows from financing activities.
The cost of capital is also generally covered under the Financing Activity.
Ind AS 7 states that the cash flows from Financing activity are useful in predicting claims on future
cash flows by providers of capital to the entity.

Cash Inflows from Financing Activity Cash Outflows from Financing Activity
Cash proceeds from issuing shares or other Cash payments to owners to acquire or redeem
equity instruments; the entity’s shares;
Cash proceeds from issuing debentures, Cash repayments of amounts borrowed; and
loans, notes, bonds, mortgages and other
Short-term or long-term borrowings; Cash payments by a lessee for the reduction of
the outstanding liability relating to
A finance lease.

Illustration 4
From the following transactions taken from a parent company having multiple businesses and
multiple segments, identify which transactions will be classified as operating Investing and
Financing:

Sr. No. Nature of transaction

1 Issued preference shares
2 Purchased the shares of 100% subsidiary company
3 Dividend received from shares of subsidiaries
4 Dividend received from other companies
5 Bonus shares issued
6 Purchased license for manufacturing of special drugs
7 Royalty received from the goods patented by the company
8 Rent received from the let out building (letting out is not main business)
9 Interest received from the advances given
10 Dividend paid
11 Interest paid on security deposits

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12 Purchased goodwill
13 Acquired the assets of a company by issue of equity shares (not parting any cash)
14 Interim dividends paid
15 Dissolved the 100% subsidiary and received the amount in final settlement

Solution
Sr. Nature of transaction Operating / Investing
No. / Financing /Not to be
considered
1 Issued preference shares Financing
2 Purchased the shares of 100% subsidiary company Investing
3 Dividend received from shares of subsidiaries Investing
4 Dividend received from other companies Investing / operating
5 Bonus shares issued No cash flow
6 Purchased license for manufacturing of special drugs Investing
7 Royalty received from the goods patented by the company Operating
8 Rent received from the let out building (letting out is not main Investing
business)
9 Interest received from the advances given Operating
10 Dividend paid Financing
11 Interest paid on security deposits Financing
12 Purchased goodwill Investing
13 Acquired the assets of a company by issue of equity shares ( Not to be considered
not parting any cash)
14 Interim dividends paid Financing
15 Dissolved the 100% subsidiary and received the amount in final Investing
settlement

*****

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3.9 REPORTING CASH FLOWS FROM OPERATING

ACTIVITIES

Major classes of gross cash receipts

Direct Method
and gross cash payments are disclosed

Cash Flows from

Operating
Activities Profit or loss is adjusted for the effects of
transactions of a non-cash nature, any
deferrals or accruals of past or future
Indirect Method
operating cash receipts or payments, and
items of income or expense associated
with investing or financing cash flows

• An entity shall report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and gross cash payments
are disclosed; or
(b) the 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.
• 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 obt ained 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 investing or financing cash flows.

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Analysis
Direct method starts with cash revenue/income/ receipts of the company. All the cash expenses
will be deducted from such cash revenue. The cash profit will be adjusted for the cash flows
arising from investing and financing activities. Non-cash expenses/losses/gains will not be
considered. The payments to suppliers and receipts from customers are also taken into
consideration. The resultant figure would cash flow from operating activity. The exercise would
be similar to converting the income and expenditure account (accrual syste m) into receipt and
payment (cash system), with the difference effects on investments and liabilities will not be
considered. Thus if we consider the vertical operating statement, direct method will have (TOP
down) approach of presentation.
• 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, unrealised 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 and operating receivables and payables.
Analysis
Indirect method is reverse of direct method. It starts with the accounting profit after tax as given
in profit and loss accounts. Thereafter, the profit will be adjusted for non-cash items, losses
and gains on investing and financing activities, interest and dividends, collection and payments
to debtors/creditors etc. Accordingly, the cash from operating activity will derived. Thus indirect
method will have (Bottom up) approach.

Note: Under both the methods the amount of cash flow from Operating activities need to be
necessarily same. It’s only the approach for presentation which differs.
Illustration 5
Find out the cash from operations by direct method and indirect method from the following
information:
Operating statement of ABC Co for the year ended 31.3.2017

Particulars `
Sales 500,000.00
Less: Cost of goods sold 350,000.00

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Administration & Selling Overheads 55,000.00

Depreciation 7,000.00
Interest Paid 3,000.00
Loss on sale of asset 2,000.00
Profit before tax 83,000.00
Tax (30,000.00 )
Profit After tax 53,000.00
Balance Sheet as on 31 st March

2017 2016
Equity and Liabilities
Shareholders’ Funds 60,000.00 50,000.00
Non-current Liabilities 25,000.00 30,000.00
Current Liabilities
Creditors 12,000.00 8,000.00
Creditors for Expenses 10,000.00 7,000.00
Provisions 8,000.00 5,000.00
Total 115,000.00 100,000.00
Assets
Fixed Assets 75,000.00 65,000.00
Investment 12,000.00 10,000.00
Current Assets
Inventories 12,000.00 13,000.00
Debtors 10,000.00 7,000.00
Cash 6,000.00 5,000.00
Total 115,000.00 100,000.00

Solution
1. Cash flow from Operations by Direct Method

Particulars ` See Note

Cash Sales 497,000.00 1
Less: Cash Purchases 345,000.00 2
Overheads 52,000.00 3

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Interest - Financing
Depreciation - Non cash item
Loss - Non cash item
Cash profit 100,000.00
Less: Tax 30,000.00
Cash profit after tax 70,000.00
Note No 1 - Cash Receipts from Sales and debtors
Particulars `
Sales 500,000.00
Add : Opening Debtors 7,000.00
Less : Closing Debtors (10,000.00)
Cash Receipts 497,000.00
Note No 2 :- Payment to creditors for Purchases
Particulars `
COGS 350,000.00
Closing stock 12,000.00
Less: Opening stock (13,000.00)
Purchases 349,000.00
Add: Opening creditors 8,000.00
Less: Closing creditors (12,000.00)
Payment to creditors 345,000.00
Note No 3 :- Payment to creditors for Expenses
Particulars `
Overheads 55,000.00
Add: Opening 7,000.00
Less: Closing creditors (10,000.00)
Payment for O/Ds 52,000.00

2. Cash flow from Operations by Indirect Method

Indirect Method `
Profit After Tax 53,000.00
Add/(Less) : Depreciation 7,000.00

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Loss on Asset 2,000.00

Interest paid 3,000.00
Decrease in Inventory 1,000.00
Increase in Debtors (3,000.00)
Increase in Creditors 4,000.00
Increase in Creditors for expenses 3,000.00
Total 70,000.00

Note: Cash flow derived from operations ` 70,000 is same both from Direct Method and Indirect
Method.
*****

3.10 REPORTING CASH FLOWS FROM INVESTING AND

FINANCING ACTIVITIES
An entity is required to report separately major classes of gross cash receipts and gross cash
payments arising from investing and financing activities, except to the extent that cash flows are
permitted to be reported on a net basis.

3.11 REPORTING CASH FLOWS ON A NET BASIS

If nothing is specifically mentioned, then as per Ind AS 7, the cash flows will be presented on Gross
Basis. Gross basis means the receipts would be shown separately and the payments will be shown
separately.
Example:
If in the year 20X1-20X2, some land is purchased for ` 2.5 crores and another land is sold for ` 3.5
crores then while presenting the information, entity shall show separately outflow of ` 2.5 crores and
inflow of ` 3.5 crores.
The above base has following exceptions
1. 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;
Examples of cash receipts and payments referred to in paragraph 22(a) are:

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 INDIAN ACCOUNTING STANDARD 79 4.101

• the acceptance and repayment of demand deposits of a bank;

• funds held for customers by an investment entity; and
• rents collected on behalf of, and paid over to, the owners of properties.
(b) Cash receipts and payments for items in which the turnover is quick, the amounts are
large, and the maturities are short.
Examples of cash receipts and payments referred to in paragraph 22(b) are advances
made for, and the repayment of:
• principal amounts relating to credit card customers;
• the purchase and sale of investments; and
• other short-term borrowings, for example, those which have a maturity period of three
months or less.
2. Cash flows arising from each of the following activities of a financial institution may 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 institutions; and
(c) cash advances and loans made to customers and the repayment of those advances and loans.

3.12 FOREIGN CURRENCY CASH FLOWS

• Cash flows arising from transactions in a foreign currency 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.
• The cash flows of a foreign subsidiary shall be translated at the exchange rates between the
functional currency and the foreign currency at the dates of the cash flows.
Example :
Suppose the money is received on account of exports on 15 th January 2017 in US $. The
company prepares the accounts in rupees. In such case the exchange rate between USD and
Rupee as on 15 th January 2017 need to be applied for conversion.
• Unrealised gains and losses arising from changes in foreign currency exchange rates are not
cash flows. However, the effect of exchange rate changes on cash and cash equivalents held
or due in a foreign currency is reported in the statement of cash flows in order to reconcile cash
and cash equivalents at the beginning and the end of the period. This amount is presented

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 4.102 FINANCIAL REPORTING

separately from cash flows from operating, investing and financing activities and includes the
differences, if any, had those cash flows been reported at end of period exchange rates.

3.13 INTEREST AND DIVIDENDS

Cash flows from interest and dividends received and paid shall each be disclosed separately.

Financing company Other company

Interest paid Cash flows arising from Cash flows from financing
operating activities activities
Interest and dividends Cash flows arising from Cash flows from investing
received operating activities activities
Dividends paid Cash flows from financing Cash flows from financing
activities activities
Illustration 6
A firm invests in a five-year bond of another company with a face value of ` 10,00,000 by paying
` 5,00,000. The effective rate is 15%. The firm recognises proportionate interest income in its
income statement throughout the period of bond.
Based on the above information answer the following question:
a) How the interest income will be treated in cash flow statement during the period of bond?
b) On maturity, whether the receipt of ` 10,00,000 should be split between interest income and
receipts from investment activity.
Solution
Interest Income will be treated as income over the period of bond in the income statement.
However, there will be no cash flow in these years because no cash has been received. On
maturity, receipt of ` 10,00,000 will be classified as investment activity with a bifurcation of interest
income & money received on redemption of bond.
*****

3.14 TAXES ON INCOME

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.
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

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 INDIAN ACCOUNTING STANDARD 79 4.103

identifiable with investing or financing 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 that are classified as investing or financing activities the tax cash flow is classified as an
investing or financing activity as appropriate.
Illustration 7
X Limited has paid an advance tax amounting to ` 5,30,000 during the current year. Out of the
above paid tax, ` 30,000 is paid for tax on long term capital gains.
Under which activity the above said tax be classified in the cash flow statements of X Limited?
Solution
Cash flows arising from taxes on income should be classified as cash flows from operating activities
unless they can be specifically identified with financing and investing activities. In the case of X
Limited, the tax amount of ` 30,000 is specifically related with investing activities.
` 5,00,000 to be shown under operating activities. ` 30,000 to be shown under investing activities.
*****

3.15 INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND

JOINT VENTURES
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.
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 joint
venture.

3.16 CHANGES IN OWNERSHIPS INTERESTS IN

SUBSIDIARIES AND OTHER BUSINESSES
3.16.1 Classification of Cash Flows as Investing Activity
• The aggregate cash flows arising from obtaining or losing control of subsidiaries or other
businesses shall be presented separately and classified as investing activities.

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 4.104 FINANCIAL REPORTING

• 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;
(b) the portion of the consideration consisting of cash and cash equivalents;
(c) the amount of cash and cash equivalents in the subsidiaries or other businesses over
which control is obtained or lost; and
(d) the amount of the assets and liabilities other than cash or cash equivalents in the
subsidiaries or other businesses over which control is obtained or lost, summarised by
each major category.
• The separate presentation of the cash flow effects of obtaining or losing control of subsidiaries
or other businesses as single line items, together with the separate disclosure of the amounts
of assets and liabilities acquired or disposed of, helps to distinguish those cash flows from the
cash flows arising from the other operating, investing and financing activities. The cash flow
effects of losing control are not deducted from those of obtaining control.
• The aggregate amount of the cash paid or received as consideration for obtaining or losing
control of subsidiaries or other businesses is reported 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.
3.16.2 Classification of Cash Flows as Financing Activity
• 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 and is required to be measured at fair value through profit or loss.
• 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.

3.17 NON-CASH TRANSACTIONS

• 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.

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 INDIAN ACCOUNTING STANDARD 79 4.105

• 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 entity. Such non-cash items will
not form part of the cash flow statement.
Examples of non-cash transactions are:
(a) the acquisition of assets either by assuming directly related liabilities or by means of a
finance lease;
(b) the acquisition of an entity by means of an equity issue; and
(c) the conversion of debt to equity
Illustration 8
X Limited acquires fixed asset of ` 10,00,000 from Y Limited by accepting the liabilities of ` 8,00,000
of Y Limited and balance amount it paid in cash. How X Limited will treat all those items in its cash
flow statements?
Solution
Investing and financing transactions that do not require the use of cash and cash equivalents shall
be excluded from a statement of cash flows. X Limited should classify cash payment of ` 2,00,000
under investing activities. The non-cash transactions – liabilities and asset should be disclosed in
the notes to the financial statements.
*****
3.17.1 Changes in liabilities arising from financing activities
• An entity shall provide disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities, including both changes arising from cash
flows and non-cash changes.
• To the extent necessary to satisfy the above requirement, an entity shall disclose the following
changes in liabilities arising from financing activities:
(a) changes from financing cash flows;
(b) changes arising from obtaining or losing control of subsidiaries or other businesses;
(c) the effect of changes in foreign exchange rates;
(d) changes in fair values; and
(e) other changes.
• Liabilities arising from financing activities are liabilities for which cash flows were, or future
cash flows will be, classified in the statement of cash flows as cash flows from financing
activities.

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 4.106 FINANCIAL REPORTING

• In addition, the disclosure requirement also applies to changes in financial assets (for example,
assets that hedge liabilities arising from financing activities) if cash flows from those financial
assets were, or future cash flows will be, included in cash flows from financing activities.
• One way to fulfil the disclosure requirement is by providing a reconciliation between the opening
and closing balances in the balance sheet for liabilities arising from financing activities,
including the changes identified.
• If an entity provides the disclosure required in combination with disclosures of changes in other
assets and liabilities, it shall disclose the changes in liabilities arising from financing activities
separately from changes in those other assets and liabilities.

3.18 COMPONENTS OF CASH AND CASH EQUIVALENTS

• An entity shall disclose the components of cash and cash equivalents and shall present a
reconciliation of the amounts in its statement of cash flows with the equivalent items reported
in the balance sheet.
• Company will provide a policy which it adopts in determining the composition of cash and cash
equivalents (As per Ind AS 1).

It has been clarified, that there should not be a difference in the amount of cash and cash
equivalent as per Ind AS 1 and as per Ind AS 7. However, as per Ind AS 7 “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.” Although Ind AS 7 permits bank overdrafts to be included as
cash and cash equivalent, for the purpose of presentation in the balance sheet, it would not be
appropriate to include bank overdraft in the line item cash and cash equivalents unless the
netting off conditions as given in paragraph 42 of Ind AS 32, Financial Instruments:
Presentation are complied with.
Bank overdraft, in the balance sheet, will be included within financial liabilities. Just b ecause
the bank overdraft is included in cash and cash equivalents for the purpose of Ind AS 7, does
not mean that the same should be netted off against the cash and cash equivalent balance in
the balance sheet. Instead Ind AS 7 requires a disclosure of the components of cash and cash
equivalent and a reconciliation of amounts presented in the cash flow statements.

Another element on account of which there could be difference between the cash and cash
equivalents presented in the balance sheet and the statement of cash flows is unrealised gains
or losses arising from changes in foreign currency exchange rates, which are not considered
to be cash flows. The following illustration would explain the issue:

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 INDIAN ACCOUNTING STANDARD 79 4.107

Illustration 9
An entity has bank balance in foreign currency aggregating to USD 100 (equivalent to ` 4,500)
at the beginning of the year. Presuming no other transaction taking place, the entity reported
a profit before tax of ` 100 on account of exchange gain on the bank balance in foreign currency
at the end of the year. What would be the closing cash and cash equivalents as per the balance
sheet?
Solution

For the purpose of statement of cash flows, the entity shall present the following:
Amount (`)
Profit before tax 100
Less: Unrealised exchange gain (100)
Cash flow from operating activities Nil
Cash flow from investing activities Nil
Cash flow from financing activities Nil
Net increase in cash and cash equivalents during the year Nil
Add: Opening balance of cash and cash equivalents 4,500
Cash and cash equivalents as at the year-end 4,500
Reconciliation of cash and cash equivalents
Cash and cash equivalents as per statement of cash flows 4,500
Add: Unrealised gain on cash and cash equivalents 100
Cash and cash equivalents as per the balance sheet 4,600
• If any changes in the policies take place, that will be dealt with as per the provisions of Ind AS 8.
*****

3.19 OTHER DISCLOSURES

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.
There are various circumstances in which cash and cash equivalent balances held by an entity are
not available for use by the group. 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 parent or other subsidiaries.
Additional information may be relevant to users in understanding the financial position and liquidity
of an entity. It may include:

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 4.108 FINANCIAL REPORTING

1. The amount of undrawn borrowing facilities that may be available for future operating activities
and to settle capital commitments, indicating any restrictions on the use of these facilities.
2. The aggregate amount of cash flows that represent increases in operating capacity separately
from those cash flows that are required to maintain operating capacity it will help the
stakeholders to know whether entity is paying proper attention for maintenance also;
3. The amount of the cash flows arising from the operating, investing and financing activities of
each reportable segment (see Ind AS 108, Operating Segments). This will provide the idea
about the company as a whole as well as the various parts of the company and their efficiencies.

3.20 SIGNIFICANT DIFFERENCES IN IND AS 7 VIS-À-VIS AS 3

S. Particulars Ind AS 7 AS 3
No.
1. Bank Overdraft Ind AS 7 specifically includes bank AS 3 is silent on this
Repayable on overdrafts which are repayable on aspect.
Demand demand as a part of cash and cash
equivalents
2. Treatment of Cash Ind AS 7 provides the treatment of AS 3 does not contain such
Payments in Specific cash payments to manufacture or requirements.
Cases acquire assets held for rental to
others and subsequently held for
sale in the ordinary course of
business as cash flows from
operating activities. Further,
treatment of cash receipts from
rent and subsequent sale of such
assets as cash flow from operating
activity is also provided.
3. New Examples of Ind AS 7 includes the following AS 3 does not contain such
Cash Flows arising new examples of cash flows examples.
arising from financing activities:
from Financing
Activities (a) cash payments to owners to
acquire or redeem the entity’s
shares
(b) cash proceeds from
mortgages
(c) cash payments by a lessee
for the reduction of the

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 INDIAN ACCOUNTING STANDARD 79 4.109

outstanding liability relating

to a finance lease.

4. Adjustment of the Ind AS 7 specifically requires AS 3 does not contain such

Profit or Loss for the adjustment of the profit or loss for requirements.
Effects of the effects of ‘undistributed profits
Undistributed Profits of associates and non-controlling
of Associates and interests’ while determining the
Non-controlling net cash flow from operating
Interests activities using the indirect
method.
5. Cash Flows Ind AS 7 does not contain this AS 3 requires cash flows
associated with requirement. associated with
Extraordinary extraordinary activities to
Activities be separately classified as
arising from operating,
investing and financing
activities
6. Disclosure of the Ind AS 7 requires an entity (except AS 3 does not contain such
Amount of Cash and an investment entity) to disclose requirements.
Cash Equivalents in the amount of cash and cash
Specific Situations equivalents and other assets and
liabilities in the subsidiaries or
other businesses over which
control is obtained or lost. It also
requires to report the aggregate
amount of the cash paid or
received as consideration for
obtaining or losing control of
subsidiaries or other businesses in
the statement of cash flows, net of
cash and cash equivalents
acquired or disposed of as a part
of such transactions, events or
changes in circumstances.
7. Cash Flows arising Ind AS 7 requires to classify cash AS 3 does not contain such
from Changes in flows arising from changes in a requirement.
Ownership Interests ownership interests in a subsidiary
in a Subsidiary that do not result in a loss of

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 4.110 FINANCIAL REPORTING

control as cash flows from

financing activities.
8. Investment in Ind AS 7 mentions the use of AS 3 does not contain such
Subsidiaries, equity or cost method while requirements.
Associates and Joint accounting for an investment in an
Ventures (Investees) associate, joint venture or a
subsidiary. It also specifically
deals with the reporting of interest
in an associate or a joint venture
using equity method.
9. Use of Different Ind AS 7 uses the term ‘functional AS 3 does not dealt with
Terminology and currency’ instead of ‘reporting these.
Translation of Cash currency’ (as used in AS 3). It also
Flows of a Foreign deals with translation of cash flows
Subsidiary of a foreign subsidiary.
10. Disclosures Ind AS 7 requires more Disclosure requirement in
disclosures. AS 3 are less.

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 INDIAN ACCOUNTING STANDARD 79 4.111

TEST YOUR KNOWLEDGE

Questions
1. Use the following data of ABC Ltd. to construct a statement of cash flows using the direct and
indirect methods:
(Amount in `)

20X2 20X1
Cash 4,000 14,000
Accounts Receivable 25,000 32,500
Prepaid Insurance 5,000 7,000
Inventory 37,000 34,000
Fixed Assets 3,16,000 2,70,000
Accumulated Depreciation (45,000) (30,000)
Total Assets 3,42,000 3,27,500
Accounts Payable 18,000 16,000
Wages Payable 4,000 7,000
Debentures 1,73,000 1,60,000
Equity Shares 88,000 84,000
Retained Earnings 59,000 60,500
Total Liabilities & Equity 3,42,000 3,27,500
20X2
Sales 2,00,000
Cost of Goods Sold (1,23,000)
Depreciation (15,000)
Insurance Expense (11,000)
Wages (50,000)
Net Profit 1,000
During the financial year 20X2 company ABC Ltd. declared and paid dividends of ` 2,500.
During 20X2, ABC Ltd. paid ` 46,000 in cash to acquire new fixed assets. The accounts
payable was used only for inventory. No debt was retired during 20X2.

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 4.112 FINANCIAL REPORTING

2. From the following summary cash account of XYZ Ltd, prepare cash flow statement for the
year ended March 31, 20X1 in accordance with Ind AS 7 using direct method.
Summary of Bank Account for the year ended March 31, 20X1

` ’000 ` ’000
Balance on 1.4.20X0 50 Payment to creditors 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from customers 2,800 Overhead Expenses 200
Sale of Fixed Assets 100 Payroll 100
Tax Payment 250
Dividend 50
Repayment of Bank loan 300
Balance on 31.3.20X1 150
3,250 3,250

3. Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a bank
in the USA. The balances as on 31.12.2017 and 31.12.2018 were US $ 100,000 and
US $ 102,000 respectively. The exchange rate on December 31, 2017 was US $ 1 = ` 45.
The same on 31.12.2018 was US $ 1 = ` 50. The increase in the balance was on account of
interest credited on 31.12.2018. Thus, the deposit was reported at ` 45,00,000 in the balance
sheet as on December 31, 2017. It was reported at ` 51,00,000 in the balance sheet as on
31.12.2018. How these transactions should be presented in cash flow for the year ended
31.12.2018 as per Ind AS 7?
Answers
1. A. DIRECT METHOD

Cash flows from operating activities 20X2

Cash received from customers 2,07,500
Cash paid for inventory (1,24,000)
Cash paid for insurance (9,000)
Cash paid for wages (53,000)
Net cash flow from operating activities 21,500
Cash flows from investing activities
Purchase of fixed assets (46,000)

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 INDIAN ACCOUNTING STANDARD 79 4.113

Cash flows from financing activities

Dividend paid (2,500)
Proceeds from issuance of debentures 13,000
Proceeds from issue of equity 4,000
Net cash flows from financing activities 14,500
Net decrease in cash and cash equivalents (10,000)
Opening Cash Balance 14,000
Closing Cash Balance 4,000

B. INDIRECT METHOD

Cash flows from operating activities 20X2

Net Profit 1,000
Adjustments for Depreciation 15,000
16,000
Decrease in accounts receivable 7,500
Decrease in prepaid insurance 2,000
Increase in inventory (3,000)
Increase in accounts payable 2,000
Decrease in wages payable (3,000)
Net cash flow from operating activities 21,500
Cash flows from investing activities
Purchase of fixed assets (46,000)
Cash flows from financing activities
Dividend paid (2,500)
Proceeds from issue of debentures 13,000
Proceeds from issue of equity 4,000
Net cash flows from financing activities 14,500
Net decrease in cash and cash equivalents (10,000)
Opening Cash Balance 14,000
Closing Cash Balance 4,000

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Working notes:
Fixed Assets Account

Particulars Amount Particulars Amount

(`) (`)
To Balance b/d 2,70,000 By Balance c/d 3,16,000
To Cash (Purchase of Fixed
Assets) 46,000
3,16,000 3,16,000
Inventory Account
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 34,000 By Cost of goods sold 1,23,000
To Creditors account (credit 2,000 By Balance c/d 37,000
purchase)
To Purchase (Bal. Figure) 1,24,000
1,60,000 1,60,000
Accounts Payable Account
Particulars Amount Particulars Amount
(`) (`)
To Balance c/d 18,000 By Balance b/d 16,000
By Inventory Account 2,000
(credit purchase) ([Link].)
18,000 18,000

Equity Share Capital Account

Particulars Amount Particulars Amount
(`) (`)
To Bal. c/d 88,000 By Balance b/d 84,000
By Bank account 4,000
(Proceeds from equity
share issued)
88,000 88,000

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 INDIAN ACCOUNTING STANDARD 79 4.115

2. XYZ Ltd.
Cash Flow Statement for the year ended March 31, 20X1 (Using the Direct Method)

Cash flows from operating activities ` ‘000 ` ‘000

Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash from operating activities 250
Cash flow from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at the beginning of the period 50
Cash at end of the period 150

3. The profit and loss account was credited by ` 1,00,000 (US$ 2000 × ` 50) towards interest
income. It was credited by the exchange difference of US$ 100,000 × (` 50 - `45) that is,
` 500,000. In preparing the cash flow statement, ` 500,000, the exchange difference, should
be deducted from the ‘net profit before taxes, and extraordinary item’. However, in order to
reconcile the opening balance of the cash and cash equivalents with its closing balance, the
exchange difference ` 500,000, should be added to the opening balance in note to cash flow
statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.’s
functional currency by applying to the foreign currency amount the exchange rate betwe en the
functional currency and the foreign currency at the date of the cash flow.

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