written by | June 2, 2022

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Table of content

What Is AS 3? Explained in Detail

The Cash Flow Statements or Accounting Standard 3 (AS 3) provides additional information for the reader. Flows of cash in and out of an organisation are shown in cash flow statements. A statement like this evaluates the ability of the company to generate cash and to utilise that cash. An evaluation of the enterprise's liquidity and solvency can be made using this statement.

A cash flow statement will help investors understand the source of a company's money and determine how much is available for operating and investing activities. It will also show where cash is going and what it's not. A positive cash flow is a goal. Understand it well.

This article concentrates on AS 3 cash flow statements and highlights the intricacies of the same.

Did You Know?

Organisations that have a healthy cash and cash equivalents flow can reflect the positive side of their ability to suit short-term debt obligations.

Also Read: What is the List of Accounting Standard

What Is AS 3 – Cash Flow Statements?

Cash flow statements or the Accounting Standard 3 (AS 3) are a common financial report that reveals the amount of cash you have in your account for a particular time. While income statements are fantastic for showing you the amount of money you've earned and spent but they're not able to reveal how much cash you've got for a particular amount of time.

If you choose to use accrual basis accounting, the income and expenditures are reported as incurred or earned, not when the money goes out/in the bank account. Therefore, whether your income statement displays the income reported, you might not have the funds from the income in your account.

Cash flow statements adjust to the data on your income report, which means you can see your net cash flow and the exact amount of cash available for the period. For instance, depreciation is reported as an expense for the month. 

But, you've made a payment in cash to the asset that you're depreciating and record it on an annual basis to determine the amount it will cost to maintain the asset every month for the duration of its life. However, cash isn't leaving your bank account each month. A cash flow report is a way to take this monthly cost and reverse it so you know the amount of cash you have in actuality, not something you've actually spent.

What is Cash and Its Equivalents?

Cash can be defined as cash in hand or demand deposits at the Bank. Cash equivalents are short-term investments that can be easily converted into cash.

Cash can be used in the following ways:

  1. Cash in hand
  2. Petty Cash
  3. Bank drafts
  4. Bank Cash
  5. Money orders

Cash equivalents can be used in the following examples:

  1. Commercial papers
  2. Money Market Funds
  3. Marketable Securities
  4. Treasury Bills
  5. Government bonds for short term

Two important criteria are used to determine the cash equivalent.

  1. There should be a lower risk in realising value.
  2. It should be easy to convert into cash.

AS 3 cash flow statements say, the movement shouldn’t be included in the cash flows between the items that form part of money or equivalents.

What is the Presentation of Cash Flow?

Now that you know what is AS 3, let’s know its presentation of cash flow. There are two basic forms of cash flow statements. 

  • Direct Method - The direct method reveals cash payments and receipts.
  • Indirect Method - The indirect method adjusts the accrual basis of net profit by including non-cash transactions.

A cash flow statement should be broken down into three main categories: operating activities, investments and financing.  

  • The operating part of a cash flow statement should show the cash used in operating, financing and investing activities. 
  • Non-cash transactions do not require cash but are equivalent to borrowing the purchase price. This category includes debt for an equity exchange, which increases equity.
  • The financing section should report non-cash transactions, such as the issue of stock or taking out loans. These non-cash transactions are generally not included in the investing portion of the statement.
  • For the presentation of cash flow, foreign subsidiaries should be reported at current exchange rates. Cash flows from joint ventures should be reported between the investee and investor, including proportionate consolidation. 
  • The corresponding categories should be based on the amount of cash received in quick transactions. As far as the cash receipts are concerned, the amounts should be large and have short maturities.
  • Cash receipts for acquisitions and disposals of other business units should be categorised as investing activities.

The cash flow statement should include transactions from all operational business activities. It should also include non-cash items that affect the cash position. Positive cash flow will help a company achieve operational growth. 

Otherwise, it may need external growth financing to continue its operations. In either case, it's important to understand the underlying cash flows before making any decisions. The most common examples of the cash flow statement are financial statements for startups and those of established businesses.

In short:

A cash flow statement should show the cash flows during the time period they were classified as:

  1. Operating Activities
  2. Financing Activities
  3. Investing Activities

Companies should prepare and present a Cash Flow Statement for operating, financing and investing activities.

Cash Flow From Operating Activities

You’ve already understood what is AS 3; let’s learn about the operating activities of the cash flow. The cash flows from operations are primarily derived from the primary revenue-making activities of an organisation. Take, for example:

  • Cash from selling or purchasing the goods or services
  • Cash payment to a supplier for goods and services
  • Cash in the form of royalties, commissions, fees and other revenue forms

Investing Activities: Cash flows from investment activities are outflows used to generate future income and cash flows.

Take, for example:

  • Cash payment for the acquisition of fixed assets
  • Cash for the acquisition of warrants, shares or debt instruments from other companies. Also, interested in Joint Ventures.
  • Cash from the disposal of fixed assets (intangibles included)

Financing Activities: These activities involve changes in the composition and size of the owner's capital or borrowings for an enterprise.

Take, for example:

  • Cash from issuing loans and debentures, bonds or notes. 
  • Cash from the issuing of shares or similar securities

Also Read: What Are Indian Accounting Standards (Ind AS)?

What Is the Cash Flow From Investing & Activities?

A company has to record separately the various cash receipts and payments’ classes resulting from investment and financing, except for those requiring reporting based on the net. Here's the explanation for Foreign Currency Cash Flows and Cash flow on Net Basis.

What are Foreign Currency Cash Flows?

Cash flows that result from foreign currency transactions should be noted in the organisation’s reporting currency with the following method: foreign currency amount *FX rate between the foreign and reporting currency at the time of cash flow. 

The impact of changes to rates of exchange on the cash or its equivalents stored in foreign currency must be recorded in a separate and distinct component in reconciling the changes in cash and its equivalent during the period.

Cash flow on Net Basis

Net cash flow is the sum of cash generated or lost over a certain duration of time, generally for several reporting periods. The concept is used to determine the short-term economic viability of an enterprise, which is believed to be a business's ability to generate money.

Cash flows that result from financing, operating or investing activities may be reported as net:

  • Cash payments and proceeds on behalf of a customer in which cash flows are a reflection of the actions of the client rather than the business itself 
  • Cash-based payments and cash proceeds for goods where the sums are huge, the turnover rate is fast, and maturities are very short.

What Are the Benefits of Preparing a Cash Flow Report?

After knowing what is AS 3, cherishing its benefits is also necessary. We have listed the benefits below:

  1. Gives information about the liquidity and solvency of the company.
  2. Allows you to assess changes in net assets and their potential impact on your company's financial structure.
  3. Gives historical data on cash inflows/outflows helps organisations make better decisions.
  4. Allows you to make a smart decision about applying funds based on cash flow timing.
  5. Helps determine the relationship between net cash flow, profitability and price changes.
  6. Historical data can verify the accuracy of past estimates of future outflows.

Conclusion

Smart Investors would never purchase the stock of a business without first reviewing its financial statements, which include cash flow. A more thorough cash flow analysis available through ERP or advanced accounting software can provide insights into the state of the finances and performance of a company.

Managers, owners and top executives must look at similar information about their organisations frequently to ensure it's in the right direction to reach its long-term and short-term financial objectives.

Cash flow and analysis of cash flows are crucial for nearly every company. If you don't have a grasp of cash flow, it is like shooting an arrow in the dark. Don't run your business without current information on cash flow. Now keep track of your cashflow and manage your incomes and expenses with ease by using the Cashbook app by Khatabook.

FAQs

Q: What are the 3 types of cash flows?

Ans:

There are 3 sorts of cash flows that organisations should be tracking and analysing to identify the  liquidity and solvency of their businesses:

  • Cash flow from operating activities
  • Cash flow from financing activities
  • Cash flow from investing activities

Q: How many Ind AS 3 are there in India?

Ans:

MCA spelt out the applicable accounting standards for organisations in India, and the count as of the date MCA notified was 41 Ind AS in total.

Q: What is AS 3?

Ans:

The AS 3 needs cash flows connected with extraordinary activities to be segmented separately as getting higher from investing, handling and financing activities.

Q: AS 3 deals with what?

Ans:

AS 3 is the information regarding an organisation's changes in cash & cash equivalents during a particular period.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.