CHAPTER

12
IND AS 7 – CASH FLOW
STATEMENT

CONCEPTS COVERED

1. INTRODUCTION
2. MEANING
3. OBJECTIVE
4. BENEFIT OF CASH FLOW STATEMENT
5. SCOPE
6. DEFINITIONS
7. CASH AND CASH EQUIVALENT
8. PRESENTATION OF CASH FLOW STATEMENT
9. REPORTING CASH FLOWS FROM OPERATING ACTIVITY
10. FOREIGN CURRENCT CASH FLOW
11. INTEREST AND DIVIDEND
12. TAXES ON INCOME
13. INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES
14. CHANGES IN OWNERSHIPS INTERESTS IN SUBSIDIARIES AND OTHER
BUSINESSES
15. NON CASH TRANSACTIONS
16. SELF PRACTICE QUESTIONS

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1. INTRODUCTION :
The balance sheet is a snapshot of entity’s financial resources and obligations at a particular point
of time and the statement of profit and loss reflects the financial performance for the period.
These two components of financial statements are based on accrual basis of accounting. The
statement of cash flows includes only inflows and outflows of cash and cash equivalents; it
excludes transactions that do not affect cash receipts and payments.

2. MEANING :
Cash flow statement, in simple words is a statement, which provides the details about how the
cash is generated by an entity during the particular reporting period and how it is applied.

CASH FLOW STATEMENT

From
From Financing From Investing
Operating
Activities Activities
Activity

3. OBJECTIVE :
1. To provide information about historical changes in cash and cash equivalents
2. To assess the ability to generate cash and cash equivalents
3. To understand the timing and certainty of their generation

4. BENEFIT OF CASH FLOW STATEMENT

1. Provides information enabling evaluation of changes in net assets and financial structure
(Liquidity and solvency)
2. Assesses the ability to manage the cash
3. Assess and compare the present value of future cash flows
4. Compares the efficiency of different entities

5. SCOPE
An entity shall prepare a statement of cash flows in accordance with the requirements of this
Standard and shall present it as an integral part of its financial statements for each period for
which financial statements are presented.

The Standard requires all entities to present a statement of cash flows.

Every organisation, whether it is small or big in size, whether it’s a manufacturing organisation or
trading concern or service organisation, needs cash for running its business. The cash is also
needed for future investments. Cash would be needed for payment of dividends, repayment of
loans as well. Thus any organisation is required to generate the cash and utilises cash
continuously.

Banks and Financial institutions are also not an exception to the same. Even if they deal with
financial products, accept deposits and give loans day in and day out, they need to generate the

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cash profit for their own organisation. They need to make investments in terms of new branches,
set ups etc. Thus statement of cash flow is equally important for Banking and Financial Institutions
as well.

6. DEFINITIONS :
The following terms are used in this Standard with the meanings specified:
1. Cash comprises cash on hand and demand deposits.
2. Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.
5. Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
6. Financing activities are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity.

7. CASH AND CASH EQUIVALENTS

Cash Equivalent means investments which can be realised easily in cash in a short period from
the date of investing the same.
1. Purpose : Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes.
2. Liquidity and Risk : For an investment to qualify as a cash equivalent it must be readily
convertible to a known amount of cash and be subject to an insignificant risk of changes in
value. Therefore, an investment normally qualifies as a cash equivalent only when it has a
short maturity of, say, three months or less from the date of acquisition.
3. Equity investments are excluded from cash equivalents unless they are, in substance, cash
equivalents.
For example, preference shares acquired within a short period of their maturity and with
a specified redemption date.
4. Bank borrowings are generally considered to be financing activities. However, where bank
overdrafts which are repayable on demand form an integral part of an entity's cash
management, bank overdrafts are included as a component of cash and cash equivalents.
A characteristic of such banking arrangements is that the bank balance often fluctuates
from being positive to overdrawn.
5. Cash Management : Cash flows exclude movements between items that constitute cash
or cash equivalents because these components are part of the cash management of an
entity rather than part of its operating, investing and financing activities. Cash
management includes the investment of excess cash in cash equivalents.

Question 1 –
Company has provided the following information regarding the various assets held by
company on 31st March 2011. Find out, which of the following items will be part of

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 cash and cash equivalents for the purpose of preparation of cash flow statement as
per the guidance provided in Ind AS 7:
Sr No. Name of Security Additional Information
1 Government Bonds 5%, open ended, main purpose was to
park the excess funds for temporary
period
2. Fixed deposit with SBI 12%, 3 years maturity on 1st Jan 2014
3. Fixed deposit with HDFC 10%, original term was for 2 years, but
due for maturity on 30.06.2011
4. Redeemable Preference shares The redemption is due on 30th April
in ABC ltd 2011
5. Cash balances at various banks All branches of all banks in India
6. Cash balances at various banks All international branches of Indian
banks
7. Cash balances at various banks Branches of foreign banks outside India
8 Bank overdraft of SBI Fort branch Temporary overdraft, which is payable
on demand
9 Treasury Bills 90 days maturity

8. PRESENTATION OF STATEMENT OF CASH FLOWS :

The statement of cash flows shall report cash flows during the period classified by operating,
investing and financing activities.

Operating Activity :
Operating Cash Inflows Operating Cash Outflows
Cash receipts from the sale of goods and the Cash payments to suppliers for goods and
rendering of services services
Cash receipts from royalties, fee, commission Cash payments to and on behalf of
and other revenue employees
Cash receipts and cash payments of an Cash payments or refunds of income taxes
insurance entity for premiums and claims, unless they can be specifically identified with
annuities and other policy benefits financing and investing activities
Cash receipts and payments from contracts
held for dealing or trading purposes

Question 2 –
From the following transactions, identify which transactions will be qualified for the
calculation of operating cash flows, if company is into the business of trading of mobile
phones
No. Nature of Transactions
1 Receipt from sale of mobile phones
2 Purchases of mobile phones from various companies
3 Employees expenses paid

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 4 Advertisement expenses paid
5 Credit sales of mobile
6 Misc. charges received from customers for repairs of mobiles
7 Warranty claims received from the companies
8 Loss due to decrease in market value of the closing stock of old mobile phones
9 Payment to suppliers of mobile phones
10 Depreciation on furniture of sales showrooms
11 Interest paid on cash credit facility of the bank
12 Profit on sale of old computers and printers, in exchange of new laptop and
printer
13 Advance received from customers
14 Sales Tax and excise duty paid
15 Proposed dividend for the current financial year

Certain Specific Issues :

1. Profit / Loss on Sale of Assets : Some transactions, such as the sale of an item of plant,
may give rise to a gain or loss that is included in recognised profit or loss. The cash flows
relating to such transactions are cash flows from investing activities.
2. Properties built for let out : Cash payments to manufacture or acquire assets held for
rental to others and subsequently held for sale are cash flows from operating activities.
The cash receipts from rents and subsequent sales of such assets are also cash flows from
operating activities.
3. Operations of Financial companies and Banks : An entity may hold securities and loans for
dealing or trading purposes, in which case they are similar to inventory acquired
specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing
or trading securities are classified as operating activities. Similarly, cash advances and loans
made by financial institutions are usually classified as operating activities since they relate
to the main revenue producing activity of that entity.

Investing Activity :
Investing Cash Inflows Investing Cash Outflows
Cash receipts from sales of property, plant Cash payments to acquire property, plant and
and equipment, intangibles and other long- equipment, intangibles and other long-term
term assets assets. These payments include those relating
to capitalised development costs and self
constructed property, plant and equipment
Cash receipts from sales of equity or debt Cash payments to acquire equity or debt
instruments of other entities and interests in instruments of other entities and interests in
joint ventures (other than receipts for those joint ventures (other than payments for those
instruments considered to be cash instruments considered to be cash
equivalents and those held for dealing or equivalents or those held for dealing or
trading purposes) trading purposes);

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 Cash receipts from the repayment of Cash advances and loans made to other
advances and loans made to other parties parties (other than advances and loans made
(other than advances and loans of a financial by a financial institution)
institution)
Cash receipts from futures contracts, forward Cash payments for futures contracts, forward
contracts, option contracts and swap contracts, option contracts and swap
contracts except when the contracts are held contracts except when the contracts are held
for dealing or trading purposes, or the for dealing or trading purposes, or the
receipts are classified as financing activities payments are classified as financing activities

Question 3 –
From the following transactions taken from a private sector bank operating in India,
identify which transactions will be classified as operating and which would be classified
as Investing activity.
No. Nature of transaction paid
1 Interest received on loans
2 Interest paid on Deposits
3 Deposits accepted
4 Loans given to customers
5 Loans repaid by the customers
6 Deposits repaid
7 Commission received
8 Lease rentals paid for various branches
9 Service tax paid
10 Furniture purchased for new branches
11 Implementation of upgraded banking software
12 Purchase of shares in 100% subsidiary for opening a branch in Abu Dhabi
13 New cars purchased from Honda dealer, in exchange of old cars
14 Provident fund paid for the employees
15 Issued employee stock options

Financing Activity :
Cash Inflows from Financing Activity Cash Outflows from Financing Activity
Cash proceeds from issuing shares or other Cash payments to owners to acquire or
equity instruments; redeem the entity’s shares;
Cash proceeds from issuing debentures, loans, Cash repayments of amounts borrowed; and
notes, bonds, mortgages and other
Short-term or long-term borrowings; Cash payments by a lessee for the reduction
of the outstanding liability relating to
A finance lease.

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 Question 4 –
From the following transactions taken from a parent company having multiple
businesses and multiple segments, identify which transactions will be classified as
operating Investing and Financing:
No. Nature of transaction
1 Issued Preference Shares
2 Purchased the shares of 100% subsidiary company
3 Dividend received from shares of subsidiaries
4 Dividend received from other companies
5 Bonus shares issued
6 Purchased license for manufacturing of special drugs
7 Royalty received from the goods patented by the company
8 Rent received from the let out building (letting out is not main business)
9 Interest received from the advances given
10 Dividend paid
11 Interest paid on security deposits
12 Purchased goodwill
13 Acquired the assets of a company by issue of equity shares (not parting any
cash)
14 Interim dividends paid
15 Dissolved the 100% subsidiary and received the amount in final settlement

9. REPORTING CASH FLOWS FROM OPERATING ACTIVITY :

• An entity shall report cash flows from operating activities using either:
1. the direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
2. the indirect method, whereby profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense associated
with investing or financing cash flows.
• Entities are encouraged to report cash flows from operating activities using the direct
method.

Question 5 –
Find out the cash from operations by direct method and indirect method from the
following information:
Operating statement of ABC Co for the year ended 31.3.2017
Particulars Rs
Sales 500,000
Less : Cost of goods sold 350,000
Administration & Selling Overheads 55,000
Depreciation 7,000
Interest Paid 3,000

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 Loss on sale of asset 2,000
Profit before tax 83,000
Tax (30,000)
Profit After tax 53,000

Balance Sheet as on 31st March

2017 2016
Equity and Liabilities
Shareholders’ Funds 60,000 50,000
Non-current Liabilities 25,000 30,000
Current Liabilities
Creditors 12,000 8,000
Creditors for Expenses 10,000 7,000
Provisions 8,000 5,000
Total 115,000 100,000
Assets
Fixed Assets 75,000 65,000
Investment 12,000 10,000
Current Assets
Inventories 12,000 13,000
Debtors 10,000 7,000
Cash 6,000 5,000
Total 115,000 100,000

10. FOREIGN CURRENCT CASH FLOW :

• Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s
functional currency by applying to the foreign currency amount the exchange rate
between the functional currency and the foreign currency at the date of the cash flow.
• The cash flows of a foreign subsidiary shall be translated at the exchange rates between
the functional currency and the foreign currency at the dates of the cash flows.
Example : Suppose the money is received on account of exports on 15th January 2017 in
US $. The company prepares the accounts in rupees. In such case the exchange rate
between USD and Rupee as on 15th January 2017 need to be applied for conversion.
• Unrealised gains and losses arising from changes in foreign currency exchange rates are
not cash flows. However, the effect of exchange rate changes on cash and cash equivalents
held or due in a foreign currency is reported in the statement of cash flows in order to
reconcile cash and cash equivalents at the beginning and the end of the period. This
amount is presented separately from cash flows from operating, investing and financing
activities and includes the differences, if any, had those cash flows been reported at end
of period exchange rates.

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11. INTEREST AND DIVIDENDS :
Cash flows from interest and dividends received and paid shall each be disclosed separately.
Financing Company Other company
Interest Paid Cash flows arising from Cash flows from financing
operating activities activities
Interest and Dividend Cash flows arising from Cash flows from investing
Received operating activities activities
Dividend Paid Cash flows from financing Cash flows from financing
activities activities

Question 6 –
A firm invests in a five-year bond of another company with a face value of Rs.10,00,000
by paying Rs.5,00,000. The effective rate is 15%. The firm recognises proportionate
interest income in its income statement throughout the period of bond. Based on the
above information answer the following question:
a) How the interest income will be treated in cash flow statement during the
period of bond?
b) On maturity, whether the receipt of Rs.10,00,000 should be split between
interest income and receipts from investment activity.

12. TAXES ON INCOME :

Cash flows arising from taxes on income shall be separately disclosed and shall be classified as
cash flows from operating activities unless they can be specifically identified with financing and
investing activities.

Taxes on income arise on transactions that give rise to cash flows that are classified as operating,
investing or financing activities in a statement of cash flows. While tax expense may be readily
identifiable with investing or financing activities, the related tax cash flows are often
impracticable to identify and may arise in a different period from the cash flows of the underlying
transaction. Therefore, taxes paid are usually classified as cash flows from operating activities.
However, when it is practicable to identify the tax cash flow with an individual transaction that
gives rise to cash flows that are classified as investing or financing activities the tax cash flow is
classified as an investing or financing activity as appropriate.

Question 7 – X Limited
X Limited has paid an advance tax amounting to Rs.5,30,000 during the current year.
Out of the above paid tax, Rs.30,000 is paid for tax on long term capital gains. Under
which activity the above said tax be classified in the cash flow statements of X Limited?

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13. INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES :
When accounting for an investment in an associate, a joint venture or a subsidiary accounted for
by use of the equity or cost method, an investor restricts its reporting in the statement of cash
flows to the cash flows between itself and the investee, for example, to dividends and advances.

An entity that reports its interest in an associate or a joint venture using the equity method
includes in its statement of cash flows the cash flows in respect of its investments in the associate
or joint venture, and distributions and other payments or receipts between it and the associate
or joint venture.

14. CHANGES IN OWNERSHIPS INTERESTS IN SUBSIDIARIES AND OTHER BUSINESSES :

Classification of Cash Flows as Investing Activity :
• The aggregate cash flows arising from obtaining or losing control of subsidiaries or other
businesses shall be presented separately and classified as investing activities
• An entity shall disclose, in aggregate, in respect of both obtaining and losing control of
subsidiaries or other businesses during the period each of the following:
(a) the total consideration paid or received;
(b) the portion of the consideration consisting of cash and cash equivalents;
(c) the amount of cash and cash equivalents in the subsidiaries or other businesses
over which control is obtained or lost; and
(d) the amount of the assets and liabilities other than cash or cash equivalents in the
subsidiaries or other businesses over which control is obtained or lost, summarised
by each major category.
• The separate presentation of the cash flow effects of obtaining or losing control of
subsidiaries or other businesses as single line items, together with the separate disclosure
of the amounts of assets and liabilities acquired or disposed of, helps to distinguish those
cash flows from the cash flows arising from the other operating, investing and financing
activities. The cash flow effects of losing control are not deducted from those of obtaining
control.
• The aggregate amount of the cash paid or received as consideration for obtaining or losing
control of subsidiaries or other businesses is reported in the statement of cash flows net
of cash and cash equivalents acquired or disposed of as part of such transactions, events
or changes in circumstances.

Classification of Cash Flows as Financing Activity :

• Cash flows arising from changes in ownership interests in a subsidiary that do not result in
a loss of control shall be classified as cash flows from financing activities, unless the
subsidiary is held by an investment entity and is required to be measured at fair value
through profit or loss.

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• Changes in ownership interests in a subsidiary that do not result in a loss of control, such
as the subsequent purchase or sale by a parent of a subsidiary’s equity instruments, are
accounted for as equity transactions (see Ind AS 110), unless the subsidiary is held by an
investment entity and is required to be measured at fair value through profit or loss.
Accordingly, the resulting cash flows are classified in the same way as other transactions
with owners.

15. NON-CASH TRANSACTIONS :

• Investing and financing transactions that do not require the use of cash or cash equivalents
shall be excluded from a statement of cash flows.
• Such transactions shall be disclosed elsewhere in the financial statements in a way that
provides all the relevant information about these investing and financing activities.
• Many investing and financing activities do not have a direct impact on current cash flows
although they do affect the capital and asset structure of an entity. Such non-cash items
will not form part of the cash flow statement. Examples of non-cash transactions are:
(a) the acquisition of assets either by assuming directly related liabilities or by means
of a finance lease;
(b) the acquisition of an entity by means of an equity issue; and
(c) the conversion of debt to equity

16. SELF PRACTICE QUESTIONS :

Question 8 – X Limited
X Limited acquires fixed asset of Rs.10,00,000 from Y Limited by accepting the liabilities
of Rs.8,00,000 of Y Limited and balance amount it paid in cash. How X Limited will treat
all those items in its cash flow statements?

Question 9 – An entity
An entity has bank balance in foreign currency aggregating to USD 100 (equivalent to
Rs.4,500) at the beginning of the year. Presuming no other transaction taking place,
the entity reported a profit before tax of Rs.100 on account of exchange gain on the
bank balance in foreign currency at the end of the year. What would be the closing
cash and cash equivalents as per the balance sheet?

Question 10 – ABC Ltd.

Use the following data of ABC Ltd. to construct a statement of cash flows using the
direct and indirect methods:
2012 2011
Cash 4,000 14,000

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 Accounts Receivable 25,000 32,500
Prepaid Insurance 5,000 7,000
Inventory 37,000 34,000
Fixed Assets 3,16,000 27,0000
Accumulated Depreciation (45,000) (30,000)
Total Assets 3,42,000 3,27,500
Accounts Payable 18,000 16,000
Wages Payable 4,000 7,000
Debentures 1,73,000 1,60,000
Equity Shares 88,000 84,000
Retained Earnings 59,000 60,500
Total Liabilities & Equity 3,42,000 3,27,500

Sales 2,00,000
Cost of Goods Sold (1,23,000)
Depreciation (15,000)
Insurance Expense (11,000)
Wages (50,000)
Net Profit 1,000
During the financial year 20X2 company ABC Ltd. declared and paid dividends of
Rs.2,500.
During 2012, ABC Ltd. paid Rs.46,000 in cash to acquire new fixed assets. The accounts
payable was used only for inventory. No debt was retired during 2012.

Question 11 – XYZ Ltd.

From the following summary cash account of XYZ Ltd., prepare cash flow statement for
the year ended March 31, 2011 in accordance with Ind AS 7 using direct method.
Summary of Bank Account for the year ended March 31, 2011
Rs.000’0 Rs.000’0
Balance on 1.4.2010 50 Payment to creditors 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from customers 2,800 Overhead Expenses 200
Sale of Fixed Assets 100 Payroll 100
Tax Payment 250
Dividend 50
Repayment of Bank loan 300
Balance on 31.3.2011 150
3,250 3,250

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 Question 12 – Z Ltd.
Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a
bank in the USA. The balances as on 31.12.2017 and 31.12.2018 were US $ 100,000
and US $ 102,000 respectively. The exchange rate on December 31, 2017 was US $ 1
= Rs.45. The same on 31.12.2018 was US $ 1 = Rs.50. The increase in the balance was
on account of interest credited on 31.12.2018. Thus, the deposit was reported at
Rs.45,00,000 in the balance sheet as on December 31, 2017. It was reported at
Rs.51,00,000 in the balance sheet as on 31.12.2018. How these transactions should be
presented in cash flow for the year ended 31.12.2018 as per Ind AS 7?

Thanks ….

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