Preparation of Cash flow Statement (Accounting Standard-3)

10/06/2020 1 By indiafreenotes

AS3 revised in 1997 has recommended revised Cash Flow Statement [CFS] for listed companies and other industrial, commercial, and business undertakings in the private and public sector. It is at present recommendatory in character.

According to revised AS 3, CFS should be prepared in such a way as to report the cash flows during the period separately for operating, investing, and financing activities.

1. Cash Flows from Operating Activities.

Examples are as follows:

(a) Cash receipts from sale of goods and services;

(b) Cash receipts from royalties, fees, commission, and other revenue;

(c) Cash payments to suppliers of goods and services;

(d) Cash payments to employees;

(e) In the case of insurance companies, cash receipts and payments for premium received and claims and other benefits to policy holders;

(f) Payment and refund of income tax;

(g) Cash receipts and payments relating to futures and options contracts taken up for trading purposes.

2. Cash Flows from investing activities.

Examples of such activities are as follows:

(a) Purchase of fixed assets including intangibles and payments relating to capitalized research and development cost and self-constructed fixed assets.

(b) Cash receipts from sale of fixed assets including intangibles.

(c) Purchase of securities for cash such as shares, warrants, and debt instruments of other enterprises.

(d) Sale of securities for cash

(e) Loans and advances given to third parties

(f) Loans and advances collected from third parties

(g) Cash receipts and payments relating to futures and options contracts entered into for investment purposes.

3. Cash Flows from financing activities.

Examples of such activities are as follows:

(a) Cash receipts from the issue of shares and other similar instruments,

(b) Cash receipts from the issue of debentures, bonds, long or other short-term borrowing,

(c) Redemption of shares and repayment of amounts borrowed.

The following illustrations would make clear the preparation of CFS under AS 3 method and Traditional method.

Illustration 1:

Balance sheets of X and Y on 1-1-2001 and 31.12-2001 were as follows:

Balance Sheet
Liabilities 2000




Assets 2000




Creditors 40,000 44,000 Cash 10,000 7,000
Mrs X’s loan 25,000 Debtors 30,000 50,000
Loan from Bank 40,000 50,000 Stock 35,000 25,000
Capital 1,25,000 1,53,000 Machinery 80,000 55,000
Land 40,000 50,000
Building 35,000 60,000
2,30,000 2,47,000 2,30,000 2,47,000

During the year, a machine costing Rs. 10,000 (accumulated depreciation Rs.3,000) was sold for Rs.5,000.

The provision for depreciation against machinery as on 1-1-2001, was Rs.25,000, and on 31-12-2001 it was Rs.40,000. Net profit for the year 2001 amounted to Rs.45,000. You are required to prepare cash flow statement.

You are required to prepare CFS under AS 3 [Revised] method.


I Cash flow from Operating Activities: Rs. Rs.
  Net profit made during the Year 45,000  
  Adjustment from depreciation 18,000  
  Loan on sale of machinery 2,000  
  Operating Profit before working capital changes 65,000  
  Decrease in stock 10,000  
  Increase in Creditors 4,000  
  Increase in Debtors [20,000]  
  Net Cash flow from operating Activities   59,000
II Cash flows from Investing Activities:    
  Sale of machinery 5,000  
  Purchase of land (10,000)  
  Purchase of building (25,000)  
  Net cash flow from investing activities   (30,000)
III Cash flows from Financing activities    
  Loans from Bank 10,000  
  Mrs. X’s loans repaid (25,000)  
  Drawings (17,000)  
  Net Cash flows from Financing activities   [32,000]
  Net increase or decrease in cash and cash equivalent   [3,000]
  Cash and cash equivalent opening balance   10,000
  Cash and cash equivalent closing balance   7,000


  1. Cash and cash equivalents include cash and bank balances and risk less short-term investments.
  2. Cash flow from operations is computed in the statement itself instead of preparing a separate statement showing cash from operations as in the case of traditional method.
  3. Figures given within brackets represent cash outflows.