Page 113 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 6. Cash proceeds from issuing shares or other similar instruments are the examples of cash

flow from ………………… activities.

7. The ………………… are not recorded in cash flow statement because they do not have a

direct impact on the current cash flow while they affect the capital and assets as purchase

of fixed assets by the issue of shares or debentures.
8. Cash flow arising from the ………………… is shown in the cash flow statement after

classifying it into operating, investing and fi nancing activities.
6.3 Preparation of Cash Flow Statement

Cash flow statement provides information about the cash receipts and payments of an enterprises

for a given period. It provides important information that supplements the profit and loss account
and balance sheet.
The statement of cash flows is required to be reported by Accounting Standard-3 (Revised ) issued

by the Institute of Chartered Accountants of India in March 1997 Which replaces the ‘Changes in
Financial Position’ as per AS-3.
There are certain changes in the preparation of cash flow statement from the previous methods

as a result of the introduction of AS-3 (Revised).
AS-3 (Revised) is mandatory in nature in respect of accounting periods commencing on or after
1-4-2001 for the following:
1. Enterprises whose equity or debt securities are listed on a recognised stock exchange in
India, and enterprises that are in the process of issuing equity or debt securities that will
be listed on a recognised stock exchange in India as evidenced by the board of directors’
resolution in this regard.
2. All other commercial, industrial and business reporting enterprises, whose turnover for
the accounting period exceeds ` 50 crores.
There are two methods of converting net profit into net cash flows from operating activities:

(i) Direct method, and
(ii) Indirect method.

Direct Method

Under direct method, cash receipts from operating revenues and cash payments for operating
expenses are arranged and presented in the cash flow statement. The difference between cash

receipts and cash payments is the net cash flow from operating activities. It is in effect a cash

basis profit & loss account. In this case, each cash transaction is analysed separately and the total
cash receipts and payments for the period are determined. The summarised data for revenue

and expenses can be obtained from the financial statements and additional information. We may
convert accrual basis of revenue and expenses to equivalent cash receipts and payments. Make
sure that a uniform procedure is adopted for converting accrual base items to cash base items.
The following are some examples of usual cash receipts and cash payments resulting from
operating activities:
1. Cash sales of goods and services;
2. Cash collected from debtors (customers);

3. Cash receipts of interest or dividends;
4. Cash receipts of royalties, fees, commission and other revenues;

108 LOVELY PROFESSIONAL UNIVERSITY