IND-AS 7: Cash Flow Statement

Understanding the Statement of Cash Flows (SCF)

Let's break down the Statement of Cash Flows (SCF) in simple terms. It's like a report card that shows how a company manages its money, where the money came from, and where it went.

1. Introduction

• What is it? The Statement of Cash Flows (SCF) is an extra financial report that companies provide to show how they generated and used cash during a specific time period (usually a year).
• Why is it important? This report helps people (like investors, lenders, and managers) understand a company's ability to create cash, how they spend it, and whether they're good at managing their money.

2. Objectives and Benefits

The SCF helps users evaluate:

• Ability to generate cash: How well the company brings in cash and cash equivalents.
• Use of cash: How the company spends or invests its cash.
• Future cash needs: Whether the company needs more cash in the future.
• Predicting future cash flows: Whether the company’s past cash flow predictions were accurate, and to make better predictions about the timing and certainty of future cash flows
• Changes in financial structure: How the company's capital structure has changed.

3. Scope

• Who needs it? All companies need to prepare a Statement of Cash Flows, and it must be presented as part of their complete set of financial statements.

4. Definitions

Let's understand the key terms:

• Cash:

  • Includes: Actual cash on hand, money in the bank, and demand deposits (money you can withdraw without notice).
  • Excludes: Long-term deposits that you can't withdraw without penalty.

• Cash Equivalents:

  • What are they? Short-term, highly liquid investments that can easily be converted into cash.
  • Key conditions:
    • Easily converted into cash quickly.
    • Have very low risk of losing value when converted.
    • Have a maturity of three months or less from when they were acquired.
  • Examples:
    • Treasury bills, Government securities (with maturity within 3 months).
    • Preference shares (if acquired within 3 months of redemption date).
    • NOT: Investments in equity shares (too much risk of value change).

• Important Notes on Cash and Cash Equivalents:

  • Companies must list what they consider as cash and cash equivalents.
  • If the list doesn't directly match items in the main financial statements, the company needs to explain the differences.
  • Changes to the list are considered changes in accounting policy.

Classification of Cash and Cash Equivalents (As per the Companies Act, 2013 and related Guidance):

• Cash and Cash Equivalents: Include the items as described above (cash in hand, cash at bank, demand deposits, and short term investments).
• Bank balances other than cash and cash equivalents:
  • Include items like:
    • Balances held as margin money for loans or guarantees.
    • Bank deposits with an original maturity between 3 and 12 months.
• Other current Financial Assets: Include bank deposits where the original term is more than 12 months but the remaining maturity is less than 12 months from the balance sheet date.
• Other non-current financial assets: Include bank deposits where both the original maturity and the remaining maturity are more than 12 months from the balance sheet date.

Presentation of Statement of Cash Flow (SCF)

As per the standard, CASH ACTIVITIES of an entity are classified into three. Such classification should be most appropriate to its business. The classification is based on the nature of business of the entity.

Broadly SCF is presented in the following manner. It is discussed in detail in the next paragraphs.

Statement of cash flow of X Ltd. for the year ended 31-3-20XX