A
Cash Flow Statement no doubt helps the investor in making economic decisions
as it helps in ascertaining the entities ability and certainty to generate cash
and cash equivalent. As we all know that the way market and scope of merger,
acquisitions takeover, etc., has grown over the last decade entities cash flow
stream have a huge impact on the entities valuation as going concern. One of
the advantages of the Cash flow Statement is that it helps in bifurcating the
entities cash flows (inflow/outflow) in operating activities, investing
activities and financing activities respectively.
Enactment of Companies
Act, 2013 have certainly is going to be change the financial reporting requirements
for the Indian Entities including preparation of Cash Flow Statement need to be
presented by the entities as a part of financial statements. As per the
definition prescribed u/s 2 (40) of the Companies Act, 2013, a set of financial
statement includes Cash Flow Statements. However certain categories of
Companies such as One Person Companies (OPC) and Dormant Companies are exempted
from the requirement of preparing Cash Flow Statements. It is also need to be
kept in mind that after the enactment of Companies Act, 2013, it is expected
that the process of notifying IFRS converged Indian Accounting Standards (Ind
ASs) may be expedited by the Government.
Existing AS and Ind AS dealing with Cash
Flow Statements defined Cash Equivalent as follows:
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.
Some of the people
believe that an investment such as fixed deposits, debentures with a remaining
maturity period of less than three months at the balance sheet date constitute
cash equivalent, which is absolutely incorrect. As per the definition cash
equivalent are 'short term' investment, which means a investment with a
original maturity period of less than three month or less from the date of acquisition rather than remaining
period to maturity from the balance sheet date. For example, sometimes it does
happen that pending approval for some project or due to other reasons entities
invest their money in the very short term investment options such as fixed deposits,
treasury bills, etc., such investment qualifies to be termed as Cash
Equivalent.
Contributed by-
CA. Achin Poddar
