Treatment of Certain Items in the Cash Flow Statement as per AS 3

The following points will highlight the treatment of seven items in the cash flow statement.

Item # 1. Extraordinary Items:

Any cash flow relating to extraordinary items should be as far as possible, be classified into operating, investing or financing activities and those items should be separately disclosed in the cash flow statement.

Some of the examples for extraordinary items are bad debts recovered, claims from insurance companies, winning of a law suit or lottery etc.

Item # 2. Interest Received:

(a) It should be considered as cash inflow under investment activities when it is received from long-term investment.

(b) It should be treated as cash inflow under operating activities when it is received from short-term investment classified as cash equivalents.

Item # 3. Interest Paid:

(a) Interest paid on debentures and other long-term loans should be classified as cash outflow from financing activities.

(b) Interest paid on working capital loan e.g., bank overdraft, should be classified as cash outflow under operating activities.

Item # 4. Dividend Received:

(a) Dividend received by a financial enterprise should be in operating activities.

(b) For companies other than financial enterprises, dividend received should be classified as cash flows from investment activities.

Item # 5. Dividend Paid:

Dividends paid should be always considered as cash outflows from financing activities —regardless of the nature of the enterprise.

Item # 6. Taxes on Income:

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

Item # 7. Non-cash Transactions:

Investing and financing transactions not involving the use of cash or cash equivalents i.e., the acquisition of an enterprise by means of issue of shares or conversion of debt to equity etc., should be excluded from cash flow statement.

Submitted by : Dr. Vincent, Category : Cash Flow Statement