Revenue is vanity, profit is sanity but cash flow is king. Usually, one always focuses on the profit and loss statement and lesser on the cash flow statements, it is like driving along and looking at the speedometer, while one is out of gas.
As the last phase of Indian Accounting Standards (IND AS) is due to set in from April 1, let’s look at the cash flow statement under the new accounting regime.
IND AS 7 makes it easy for an accountant to prepare a cash flow statement and for an analyst to read it up. What is cash exactly? Cash on hand, demand deposits, constitute cash. Basically, it is something that is not for investment purposes and held for meeting short term commitments and is easily convertible to cash and is not illiquid.
A cash flow statement basically summarizes cash flow from three activities namely, operating, investing and financing.
Operating activities are those that are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities (Example: Cash given to creditors, cash received from debtors).
Investing activities include the ones that are related to the acquisition and disposal of long term assets. Other expenditures that result in the recognition of assets in the balance sheet are also classified as investing activities (Example: Purchase of machinery, sale of buildings).
Financing activities are those that lead to changes in contributed equity and borrowings of an entity (Example, issue of debentures).While it is easy to classify activities into the three categories, there are certain activities that may cause confusion:
Interest and dividend, whether paid or received, are to be classified as operating activities in case of financial companies while for other entities it will be classified as financing activities. A single transaction may include cash flows that are classified differently. For example, if a fixed asset acquired on deferral payment basis, the instalment payment should be split and interest element on such fixed asset should be classified as a financing activity and repayment of the loan amount to be classified as investing activity. Bank overdrafts. which are an integral part of an entities cash management are included in as a component of cash & cash equivalent and not as a part of financing activity. Total interest paid during a period is to be disclosed in the statement of cash flows whether it has been recognised as an expense in profit or loss or capitalised in accordance with IND AS 23 Borrowing Costs. Cash flows from Taxes on Income shall be classified as cash flows from operating activities unless they can specifically be identified with Financing / Investment activities. Cash flows arising from changes in ownership interests in a subsidiary without loss of control should be classified as cash flows from financing activities in consolidated cash flow statement as they are accounted for as Equity transactions. In case an asset is acquired / manufactured for the purpose of being held for rentals to others, then in such a case, payments to acquire / manufacture such asset, receipts from such rents and subsequent sales proceeds from disposal of such assets are disclosed as cash flows from operating activities. There are certain considerations to be kept in mind and they include the following: Cash flows must be reported on a “gross” basis. Presentation on Net basis is permitted only in very limited cases like cash receipts / payments made on behalf of customers Non-cash investing and financing transactions are not to be disclosed in the statement of cash flows though information relevant may be provided elsewhere in the Financial Statements. Where a jointly-controlled entity is proportionately consolidated, the entity should, in the consolidated statement of cash flows, include only its proportionate share of the cash flows in the jointly controlled entity.
So, these are the basic things you need to keep in mind while preparing a cash flow statement, one of the most important part
of financial statements. And as Richard Branson said, “Never take your eyes off the cash flows, as it is the life blood of business”, it is important to get the blood test done on regular basis to understand the financial health of a company. >> Ind AS to enter its last phase on April 1: Key things to know about Ind AS 1 >>
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