Page 235 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 13.2.3 Cash Flow from Financing Activities

Under financial activities those activities are included which are relating to the size and

composition of capital (equity and preferences) and borrowing or loans. As per AS-3 (revised), the

separate disclosure of cash flows arising from financing activities is important because it is useful

in predicting claims on future cash flows by providers of funds (both capital and borrowings) to

the enterprise. Examples of cash flows arising from financing activities are:
1. Cash proceeds from issuing shares or other similar instruments;
2. Cash proceeds from issuing debentures, loans, notes, bonds and other short or long-term
borrowings; and
3. Cash repayments of amounts borrowed.
Figure 13.3: Diagrammatic Presentation of Cash Flow from Financing Activities

Cash Flow

Cash Inflow Cash Outflow

Issue of Shares Issue of Debentures Raising of
(equity & preference long-term loans
loan, bonds, etc.)

Redemption of Repayment of Payment of Payment of
preferencesh ares loans interest dividend sand bonds

Note 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
Contd...

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