How are the various activities classified (as per AS-3 revised) while preparing cash flow statement?
As per AS-3 (Revised), the various activities of an enterprise are classified into three categories while preparing the Cash Flow Statement: (1) Operating Activities, (2) Investing Activities, and (3) Financing Activities.
This classification helps to show separately the cash flows generated (or used) by (in) these activities. It enables the users of the Cash Flow Statement to assess the impact of these activities on the financial position of an enterprise and also on its cash and cash equivalents.
The Cash Flow Statement presents cash flows from all three activities, and the net increase (or decrease) in cash and cash equivalents is calculated by adding the cash flows from operating, investing, and financing activities (A + B + C).
Explanation
The question asks for classification of activities as per AS-3. The textbook clearly states in Section 6.5 that AS-3 classifies activities into three categories: operating, investing, and financing activities. The purpose of this classification is to separately show cash flows from each category and help users assess their impact on financial position and cash equivalents. The answer follows the structure shown in Exhibit 6.2 of the textbook.
Solution Steps
Step 1: Identify the three classifications from AS-3: Operating, Investing, and Financing Activities
Step 2: Explain the purpose of classification - to show cash flows separately from each activity
Step 3: Mention how these help users assess impact on financial position and cash equivalents