Introduction Ind AS 7, “Statement of Cash Flows,” outlines the requirements for the preparation and presentation of cash flow statements for entities in India. A cash flow statement provides critical information regarding the cash inflows and outflows of a business during a specific period, assisting investors, creditors, and other stakeholders in assessing the company’s liquidity, solvency, and financial flexibility. The objective of Ind AS 7 is to provide users with a better understanding of the cash flows of an entity, which is essential for decision-making processes related to investing, financing, and operating decisions.
Key Features of Ind AS 7
- Objective of the Standard The primary objective of Ind AS 7 is to ensure that entities provide relevant information about cash flows, segregating them into operating, investing, and financing activities. This enables users to assess the ability of the company to generate future cash flows, and how it uses cash in its operations and investments.
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Cash and Cash Equivalents
- Ind AS 7 defines cash as currency and coins, while cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, typically with an original maturity of three months or less from the acquisition date.
- Cash equivalents should be easily convertible into cash with insignificant risk of changes in value. Examples include treasury bills, marketable securities, and short-term bank deposits.
- Structure of the Statement of Cash Flows The cash flow statement under Ind AS 7 is divided into three sections:
- Operating Activities: These are the principal revenue-producing activities of the entity. Cash flows from operating activities reflect the cash generated or used in the core business operations. It includes receipts from customers, payments to suppliers and employees, and other operating expenses.
- Investing Activities: These relate to the acquisition and disposal of long-term assets and investments not included in cash equivalents. Cash flows from investing activities include the purchase and sale of property, plant, and equipment (PPE), investments in securities, and loans given or received.
- Financing Activities: These involve cash flows related to the borrowing and repayment of funds, as well as equity capital transactions. Cash flows from financing activities include issuing shares, borrowing funds, and repaying loans or paying dividends.
- Direct vs Indirect Method Ind AS 7 permits the preparation of the operating activities section using two methods:
- Direct Method: Under this method, cash inflows and outflows are directly reported. The method lists receipts from customers and payments to suppliers, among other direct receipts and payments. This method is preferred by Ind AS 7 as it provides clearer information on operating cash flows.
- Indirect Method: The indirect method adjusts the net profit or loss for non-cash items, changes in working capital, and other items to compute cash flows from operating activities. This method is commonly used because it is easier to prepare from the accounting records.
- Cash Flow Reporting
- Cash Inflows: These include receipts from customers, interest income, dividends received, etc.
- Cash Outflows: These include payments for operating expenses, acquisition of assets, interest paid, etc.
- Ind AS 7 does not allow cash flows to be classified as part of operating activities unless they directly relate to the entity’s core operations.
- Non-Cash Investing and Financing Activities Ind AS 7 requires entities to disclose non-cash transactions separately in the financial statements. These are transactions that affect the financial position of the entity but do not result in cash inflows or outflows, such as converting debt to equity, acquiring assets through finance leases, etc.
- Effect of Foreign Exchange Rates The statement also includes the impact of foreign exchange rate changes on cash and cash equivalents. This is essential for companies operating in multiple countries or dealing with foreign currencies, as currency fluctuations can impact the cash flow figures.
Example of Cash Flow Statement
Consider the following hypothetical figures for a company for the financial year:
| Particulars | Amount (₹) |
|---|---|
| Cash Flows from Operating Activities | |
| Cash receipts from customers | 15,00,000 |
| Cash payments to suppliers | (8,00,000) |
| Cash payments to employees | (3,00,000) |
| Interest received | 50,000 |
| Income tax paid | (1,00,000) |
| Net Cash from Operating Activities | 3,50,000 |
| Cash Flows from Investing Activities | |
| Purchase of machinery | (4,00,000) |
| Proceeds from sale of investment | 1,00,000 |
| Net Cash used in Investing Activities | (3,00,000) |
| Cash Flows from Financing Activities | |
| Loan received from bank | 2,50,000 |
| Repayment of long-term debt | (50,000) |
| Dividend paid | (1,00,000) |
| Net Cash from Financing Activities | 1,00,000 |
| Net Increase in Cash and Cash Equivalents | 1,50,000 |
| Cash and Cash Equivalents at the Beginning of the Year | 2,00,000 |
| Cash and Cash Equivalents at the End of the Year | 3,50,000 |