Page 112 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 6: Cash Flow Statement

Notes

Notes Treatment of Other Items
Besides the above cash flow activities AS-3 (revised) also give the dealing of the some

other items. These other items are as follows:
1. Foreign Currency Cash Flow: Unrealized gain or loss on account of change in the
foreign exchange rate is not treated as cash flow. But the effect of change of foreign

exchange on the cash and cash equivalents held in a foreign currency is recorded in
the cash flow statement to reconcile the cash and cash equivalents at the beginning

and at the end of the period. This amount is not adjusted with operating, investing
and financing activities but it is shown separately.

2. Extra-ordinary Items: Cash flow arising from the extra-ordinary item is shown in

the cash flow statement after classifying it into operating, investing and fi nancing
activities. This is done so that ordinary users may understand them easily. For
example, loss by fire in store is compensated by insurance company. It will be treated

as cash flow from operating activities.

3. Interest and Dividends: If a financial enterprise is receiving interest and dividend

then such a cash flow arising from interest and dividend will be considered into
operating activities. If interest and dividend are received by other enterprise, such

a cash flow arising from interest and dividend will be considered into investing
activities and if interest and dividend is paid, such a cash flow arising from interest

and dividend is considered into financing activities. This cash flow arising from

interest and dividend paid or received is disclosed separately.
4. Taxes on Income: If no adverse information is given relating to taxes paid on incomes,

cash flow arising from the taxes paid as income is classified in operating activities.

If taxes are paid on such income which is relating to finance, such a cash flow will be
classifi ed into fi nancial activities.
5. Non-cash Transactions: The non-cash transactions are not recorded in cash fl ow
statement because they do not have a direct impact on the current cash fl ow while
they affect the capital and assets as purchase of fixed assets by the issue of shares or

debentures. In AS-3 (revised) examples of non-cash transactions are mentioned as
below:
(a) the acquisition of assets by assuming directly related liabilities,
(b) the acquisition of an enterprise by means of issue of shares, and
(c) the conversion of debt to equity.
6. Balances of Foreign Branches: In some situations, the balance of cash and cash
equivalent held with foreign branches are not available due to foreign exchange
control or other legal restrictions. So the management should use that amount which
can be measured in cash and cash equivalent.

Self Assessment

Fill in the blanks:
4. Cash flows from ………………… activities are earned from the principal revenue -

producing activities of an enterprise.
5. ………………… activities of an enterprise include the purchase of fi xed assets.

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