AS 3: Cash Flow Statements
AS 3 deals with the presentation of cash flow statements, classifying cash flows of an enterprise into operating, investing and financing activities for a reporting period.
- Standard
- AS 3
- Activities
- Op / Inv / Fin
- Methods
- Direct / Indirect
- Typical marks
- 10–16
Applicability
Mandatory for level I enterprises and all companies covered by the Companies Act cash flow requirement (except one person companies, small companies and dormant companies).
Key points to remember
- Three classifications: operating (principal revenue-producing activities), investing (acquisition/disposal of long-term assets and investments) and financing (changes in owners' capital and borrowings).
- Operating cash flows can be reported by the direct method or the indirect method (profit adjusted for non-cash items and working-capital changes).
- Interest and dividends: for a finance company interest paid/received is operating; for others, interest and dividend received is investing and interest/dividend paid is financing.
- Cash comprises cash on hand and demand deposits; cash equivalents are short-term highly liquid investments (typically ≤ 3 months maturity).
How the exam tests it
A full 10–16 mark practical question on preparing a cash flow statement (indirect method) is a staple of Intermediate Advanced Accounting; classification MCQs are common at Foundation.
Related standards
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Talk to usWhat is the difference between the direct and indirect method?
The direct method reports major classes of gross cash receipts and payments. The indirect method starts from net profit and adjusts for non-cash items, deferrals and working-capital changes to arrive at operating cash flow.
How are interest and dividends classified under AS 3?
For financial enterprises, interest paid and interest/dividend received are operating flows. For other enterprises, interest and dividends received are investing flows, while interest and dividends paid are financing flows.
What counts as a cash equivalent?
Short-term, highly liquid investments readily convertible into known amounts of cash with insignificant risk of value change — generally investments with an original maturity of three months or less.