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AS 3: Cashflow Statements

Cash flow statement is a part of financial statements that provides a summary of cashflows of business. It also depicts how well the cash management taken place during the reporting period. 

It helps the stakeholders of the company in understanding how and from where the money is flowing into the business. The information provided in this statement will also be used to detect any misuse of cash in any activity and used to estimate future inflows and outflows of cash which will be helpful to take their economic decisions. 

Cash balances in this statement are cash in hand and bank, demand deposits and the short-term investments which shall be converted to cash in the time span of three months or less. 

As per the Accounting Standard, in this statement, Cash activities that is inflows and outflows of cash of an entity are mainly classified into Three activities.

This classification will differ from entity to entity based on the nature of business. The three different activities are as follows: 

1. Operating Activities 

The main and regular activities that produce Inflow and outflow, that is, revenue of cash like cash sales and purchases and other cash flows which does not come under other 2 Activities will come under the Operating activities.  

2. Investing Activities 

These are the activities where the cash inflows and outflows are related to investing of cash in the Long-term Assets and other investments and income received from it. The activities like purchase and sale of fixed assets and profit or loss and income or expense arise, related to such assets and any interest received from those investments will comes under these Investing activities. 

3. Financing Activities 

The activities related to the changes in the composition of owners capital, loans taken and repayment of such loans or interest arise on such loan and costs related to above stated capital composition and any other kind of finance will comes under these Financing activities. 


Also, standard provides an option to present Operating activities in 2(Two) ways namely Direct and Indirect method. 

Direct method 

  • Under this method the gross cash receipts and payments of business operations are taken and income tax paid shall be deducted to get Cash flows before extraordinary items and any extraordinary items (like disaster settlement) are added to that to get cash flow from operating activities. 


Indirect method 

  • Under this method the net cash flows from operating can be obtained by adjusting profit or loss before tax and extraordinary items with  

  1. Non-cash items such as depreciation, provisions etc, 

  1. Non operating items that is items of other 2 activities which are included in profit or loss before tax. 

  1. Changes in inventories and operating receivables and payables (current assets and liabilities). 

  1. Actual income tax payment. 

  1. Receipts/payments from extraordinary items. 

Income tax payment should be separately disclosed under operating activities. The non-cash transactions shall be disclosed elsewhere in the financial statements (notes on accounts) to provide all related information about this. 


Disclosure requirements provided in standard are as follows: 

  1. Disclose the components of cash and cash equivalents 

  1. Reconciliation of cash and cash equivalents of Cash Flow Statement with equivalent items reported in balance sheet 

  1. The balance of cash and cash equivalents left with the enterprise those are not available for use and a comment of management on that 

  1. Any additional information may be relevant to users in understanding the financial position and liquidity of an enterprise. 

AS 3 –Cash Flow Statement Vs. Ind AS 7 – Statement of Cash Flows Vs. IAS 7 – Statement of Cash Flows. 

  1. AS 3 is not a mandatory for small and medium sized companies. However, it is mandatory as per Ind AS 7. 

  1. In AS 3 Bank overdrafts are treated as an operating liability (Current liability) and this was presented in operating activity if it is repayable 3 months or less otherwise it is treated as bank borrowing and presented as financing activity but in Ind AS 7 Bank overdraft is treated as a cash equivalent item and presented by adjusting in the cash and cash equivalents. 

  1. In AS 3 cash receipts and payments of Insurance Companies from policy benefits is treated as Operating Activities but in Ind AS 7 it is excluded from operating activities. 

  1. In Ind AS 7 Cash payments to manufacturer or to acquire assets which is held for rental to other and for subsequent sale described in Ind As 16 property, Plant equipment are treated as cash flow from operating Activities but As 3 is silent about it.  

  1. According to AS 3, Cash Flow from Extraordinary Items should be disclosed under the heading of operating, Investing and Financing Activities but Ind AS 7 does not require such kind of separate disclosure. 

  1. The interest and dividend paid and interest and dividend received are treated as transaction of operating activities according to International accounting standard (IAS) 7 but in the opinion of Ind AS 7 these items to be classified in investing activity and Financing Activities accordingly.  

  1. Compared to IAS 7, AS 3 and Ind AS 7 will have some different terminologies like foreign currency instead of reporting currency, Balance sheet instead of statement of financial position, statement of profit and loss instead of statement of Comprehensive Income. 


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