Classification of Cash Flows as per Accounting Standard-3 (Revised)

Classification of Cash Flows as per Accounting Standard-3 (Revised)

According to the Accounting Standards-3 (Revised), the cash flows can be classified into three types.

1. Cash flows from Operating Activities
2. Cash flows form Investing Activities
3. Cash flows from Financing Activities

1. Cash From Operating Activities

The principal revenue producing activities of a business are called the operating activities of that enterprise. These are the main activities in which it deals. Cash flows arising from these activities are called the cash flows from operating activities. Cash flows from operating activities are the main source of revenue for a business concern. eg. for a company dealing in manufacture of electronics, selling of electronic parts or finished products are the principal revenue producing activities of the concern. For a finance company, giving and taking of loans, purchase and sale of securities are the main revenue producibg activities.
Examples-
-Cash received form the sale of goods and services.
-Cash received form commission, fees, royalties etc.
-Cash paid to suppliers to purchase raw material etc.
– Payment of expenses like wages, salaries, commision etc
-Payment and refund of tax.

2. Cash From Investing Activities

For carrying out business smoothly, an enterprise acquires long term assets like machinery, furniture, land and building. Similarly old assets are sold and new are purchased.They sometimes also invest idle funds outside the business to get additional earnings. All this results in inflow and outflow of cash. Thses flows of cash are termed as Cash flows from Investing Activities.
Examples-
– Cash paid to acquire fixed assets eg. machinery, land etc,
-Cash paid to purchase investments eg. shares and debentures of other companies.
-Cash receipts from the disposal of fixed assets.
-Cash receipts as dividend or income on investments outside the concern.
-Cash receipts from the sale of investments
-Cash receipts/ payments related to future contracts, forward contracts, option contracts, swap contracts exept when the contracts are held for trading purposes or the receipts/payment sare classified as financing activities.

3. Cash From Financing Activities

The transactions which are undertaken to arrange capital and other sources of finance for the enterprise are termed as financing activities.
Examples-
-Cash proceeds from the issue of shares or debentures and other debt instruments.
-Cash paid for the redemption of debentures.
-Cash paid for buyback of shares.
-Payment of dividends on shares and interest on debentures and other long term loans.

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