Classification of Cash Flows
As discussed earlier, the Cash, Flow Statement shows the cash inflows (sources) and cash outflows (uses or applications) of cash and cash equivalents during an accounting period. Hence, it is essential to know about the various items of sources (or inflows of cash) and uses (outflows of cash) of cash. As per the Accounting Standard-3 (AS-3) the changes resulting in inflows and outflows cash and cash equivalents arise on account of three types of activities, i.e., operating, investing and financing as discussed below:
1.8.1 (i) Operating Activities :
Operating Activities are the principal revenue producing activities of the enterprise and other activities that are not related to investing or financing activities. The examples are :
(a) Cash receipts from the sale of goods and rendering of services.
(b) Cash receipts from royalties, fees, commission and other revenue.
(c) Cash payments to suppliers of goods and services.
(d) Cash payments to and on behalf of employees for wages, etc.
(e) Cash receipts and payments of an insurance enterprise for premiums and claims, annuities and other policy benefits.
(f) Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities.
(g) Cash receipts and payments relating to future contracts, forward contracts, option contracts, and swap contracts, when the contracts are held for dealing or trading purposes.
The principal revenue producing activity of an enterprise is the main activity (business) carried on by it to earn profits. Examples of a financial enterprise; giving loans and dealing in securities is the principal revenue producing activity. Similarly, for an insurance company accepting premium and payments of claims is the principal revenue producing activity.
The net effect of the operating activities on the flow of cash is reported as cash flow from or cash used in Operating Activities in the Cash Flow Statement.
1.8.2 (ii) Investing Activities
Investing activities are the acquisition and disposal of the long-term assets and other investments, not included in cash equivalents, These activities include transactions involving purchase and sale of the long-term productive assets like machinery, land and buildings, etc., which are not held for resale. The cash flow from investing activities are:
(a) Cash payments to acquire fixed assets (including intangibles) and also payments for capitalized research and development costs and self constructed fixed assets.
(b) Cash receipts from the disposal of fixed assets (including intangibles).
(c) Cash payments to purchase (acquire) shares, warrants, or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for trading or dealing purposes).
(d) Cash receipts from sale (disposal) of shares, warrants, or debt instruments of other enterprises and interest in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes).
(e) Cash receipts from sale (disposal) of shares, warrants, or debt instruments of other enterprises and interest in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes).
(f) Cash receipts from repayments of advances and loans made to third parties (other than advances and loans of financial enterprises).
(g) Cash receipts relating to future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for trading purposes, or the receipts are classified as financing activities.
(h) Cash payments relating to future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for trading purposes, or the payments are classified as financing activities.
1.8.3 (iii) Financing Activities
Financing activities are the activities which result in changes in the size and composition of the owner’s capital (including preference share capital in the case of a company) and borrowings of the enterprise from other sources. The cash flow from financing activities are :
(a) Cash proceeds from the issue of shares or other similar instruments.
(b) Cash proceeds from the issue of debentures, loan notes, bonds and other short term borrowings.
(c) Buy-back of equity shares.
(d) Cash repayments of the amounts borrowed including redemption of debentures.
(e) Payments of dividends both equity and preference dividends.
(f) Payments for interest on debentures and loans.
Tags: Accounting standards, Assets, Cash, Cash Flow, debt, Fixed Assets, flow, inflow, intangible, intangibles, investments, outflow, revenue, royalties, wages
By: Management Duniya
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