(iii) Cash flows are inflows and outflows of cash and cash equivalents.
Investments in shares are excluded from cash equivalents unless they are, in substance, cash equivalents for example, preference shares of a company acquired shortly before their specific redemption date (provided there is only an insignificant risk of failure of the company to repay the amount at maturity).Ĭash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. A funds flow statement showed flows of working capital which included items like stock of goods and prepaid expenses which did not contribute to the short term ability of the enterprise to pay its debts. But funds flow statements suffered from certain limitations. This accounting standard dealt with the financial statement that summarised, for the period covered by it, the changes in financial position showing the sources from which funds were obtained by the enterprise and the specific uses to which funds were applied.įunds were defined as cash or cash equivalents or working capital (i.e., current assets minus current liabilities). In June, 1981 the Institute of Chartered Accounts of India issued Accounting Standard-3: Changes in Financial Position. Hence, many companies presented along with the final accounts, a statement called Funds Flow Statement showing changes in financial position. But many of those who study these statements are, for different reasons, also interested in knowing the inflows and outflows of cash or working capital.įor example, the creditors may be interested in this information to assess the short term ability of the enterprise to pay to its creditor. Income Statement and Balance Sheet are the financial statements most sought after.
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