Steps for merger and amalgamation :-

Once the merger partner has been identified and terms of merger are settled the procedure summarized in Appendix III can be followed. An explanation to the said steps is given below:

1) Scheme of amalgamation The scheme of amalgamation should be prepared by the companies, which have arrived at a consensus to merge. There is no specific form prescribed for scheme of amalgamation but scheme should generally contain the following information:

1. Particulars about transferee and transferor companies

2. Appointed date

3. Main terms of transfer of assets from transferor to transferee with power to execute on behalf or for transferee the deed or documents being given to transferee.

4. Main terms of transfer liabilities from transferor to transferee covering any conditions attached to loans/debentures/ bonds/other liabilities from bank /financial institution/ trustees and listing conditions attached thereto.

5. Effective date when the scheme will come into effect

6. Conditions as to carrying on the business activities by transferor between ‘appointed date’ and ‘effective date’.

7. Description of happenings and consequences of the scheme coming into effect on effective date.

8. Share capital of transferor company specifying authorized capital, issued capital and subscribed and paid up capital

9. Share capital of transferee company covering above heads.

10 Description of proposed share exchange ratio, any conditions attached thereto, any fractional share certificates to be issued, transferee company’s responsibility to obtain consent of concerned authorities for issue and allotment of shares and listing.

11 Surrender of shares by shareholder of transferor company for exchange into new share certificates.

12 Conditions about payment of dividend, ranking of equity shares, pro rata dividend declaration and distribution.

13 Status of employees of the transferor companies from effective date and the status of the provident fund, gratuity fund, super annuity fund or any special scheme or funds created or existing for the benefit of the employees.

14 Treatment on effective date of any debit balance of transferor company balance sheet.

15 Miscellaneous provisions covering income-tax dues, contingencies and other accounting entries deserving attention or treatment.

16. Commitment of transferor and transferee companies towards making applications/petitions under section 391 and 394 and other applicable provisions of the con Companies Act, 1956 to their respective High Courts.

17. Enhancement of borrowing limits of the transferee company upon the scheme coming into effect.

18. Transferor and transferee companies give assent to change in the scheme by the court or other authorities under the law and exercising the powers on behalf of the companies by their respective Boards.

19. Description of powers of delegatee of transferee to give effect to the scheme.

20. Qualification attached to the scheme, which require approval of different agencies, etc.

21. Description of revocation/cancellation of the scheme in the absence of approvals qualified in clause 20 above not granted by concerned authorities.

22. Statement to bear costs etc. in connection with the scheme by the transferee company.

Negotiations(merg) :-

Top management can negotiate at a time with several identified shortisted companies suited to be merger partner for settling terms of merger and pick up one of them which offers most favourable

terms. Negotiations can be had with target companies before making any acquisitional attempt. Samedrill of negotiations could be followed in the cases of merger and amalgamation.

Appendix II provides activity schedule for planning merger covering different aspects like preliminary consultations with the perspective merger partner and seeking its willingness to cooperate in investigations. There are other aspects, too, in the activity schedule covering, quantification action plan, purpose, shape, and date of

merger , profitability and valuation, taxation aspects legal aspects and development plan of the company

after merger.

Search for a merger partner :-

The top management may use their own contacts with competitors in the same line of economic activity or in the other diversified field which could be identified as better merger partners or may use the contacts of merchant bankers, financial consultants and other agencies in locating suitable merger partners. A number of corporate candidates may be shortlisted and identified. Such identificationshould be based on the detailed information of the merger partners collected from published and private sources. Such information should reveal the following aspects viz:

1) Organisational history of business and promoters and capital structure

2) Organisational goals

3) Product, market and competitors

4) Organisational setup and management pattern

5) Assets profile: Movable and immovable assets, land and building

6) Manpower – skilled, unskilled, technical personnels and detailed particulars of management employees.

Top management’s commitments towards merger and amalgamation:-

Top management defines the organisation’s goal and outlines the policy framework to achieve these objectives. The organisation’s goal for business expansion could be accomplished, inter alia through business combinations assimilating a target corporate which can remove the present deficiencies in the organization and can contribute in the required direction to accomplish the goal of business expansion through enhanced commercial activity i.e. supply of inputs and market for output product diversification, adding up new products and improved technological process, providing new distribution channels and market segments, making available technical personnel and experienced skilled manpower, research and development establishments etc. Depending upon the specific need and cost advantage with reference to creating a new set up or acquiring a well-established set-up firm.

Procedure for merger and amalgamation :-

Procedure for merger and amalgamation is different from takeover. Mergers and amalgamations are regulated under the provisions of the Companies Act, 1956 whereas takeovers are regulated under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations.

          The beginning to amalgamation may be made through common agreements between the transferor and the transferee but mere agreement does not provide a legal cover to the transaction unless it carries the sanction of company court for which the procedure laid down under section 391 of the Companies Act should be followed for giving effect to amalgamation through the statutory instrument of the court’s sanction.

          Although chapter V of the Companies Act, 1956 comprising sections 389 to 396-A deals with the issue and related aspects covering arbitration, compromises, arrangements and reconstructions but at different times and under different circumstances in each case of merger and amalgamation application of other provisions of the Companies Act, 1956 and ruled made there-under may necessarily be attracted. So, the procedure does not remain simple or literally confined to chapter V.

          The procedure is complex, involving not only the compromises or arrangements between the company and its creditors or any class of them or between the company and its members or any class of them but it involves, safeguard of public interest and adherence to public policy. These aspects are looked after by the Central Government through official liquidator on Company Law Board, Department of Company Affairs and the court has to be satisfied of the same.

Ten Steps for Conducting a Communications Audit :-

What are you communicating? Are your communications effective?
A Communications Audit will answer these questions. A Communications Audit is a systematic research method, which will identify the strengths and weaknesses of your current internal and external communications.
 

An effective Communications Audit will identify:
• how past communications were handled
• key audiences, what they currently know about your business, service, product or organization, what they need and want to know and how they prefer to be reached
• strengths and weakness in current communications programs
• untapped opportunities for future communications
 

A Communications Audit asks:
• What are our current goals and objectives for communications?
• How well is the current Communications Plan working?
• Are our messages clear and consistent? Do we have a coordinated graphic identity?
• Are we reaching key audiences with our messages and moving them to action?
• What communications have been most effective?
• What do customers think of our communications?
• Do our communications support our overall strategic plan for our business or organization?
• What would make our communications more effective in the future?
• What communications opportunities are we missing?
You may either conduct a self-assessment or hire a professional to perform the audit. These 10 steps will help you complete your Communications Audit.

Step 1: Determine key areas to be audited.
Look at both internal and external communications. Include everything from your standard identity pieces (business cards, letterhead, logo and signage) to promotional materials to news coverage received. Don’t forget to analyze your Web site and other online marketing materials.
 

Step 2: Choose your research methods.
To conduct your audit, select among numerous research methods such as one-on-one interviews, focus groups, online or telephone surveys and media analysis.
 

Step 3: Collect and evaluate your past communications.
Spread all of last year’s communications pieces–internal and external–on a conference room table. Ask:
• How did we inform the public about our business? What worked? What didn’t?
• Were our graphics coordinated and messages consistent?
• Who were our key audiences?
• What were our key messages?
• Did we reach our audiences with the right messages?
• What media coverage did we receive? Was it effective? What media opportunities did we miss?
• Did we successfully tell our story in our communications?
Take the time to analyze each communications piece. Create a written list of what worked, and what didn’t. Survey a few trusted staff and clients. What did they appreciate and why? What didn’t work for them?
 

Step 4: Look outward: Query your customers.
Choose neutral researchers to query your customers. Electronic surveys, one-on-one interviews, telephone interviews or focus groups are a few techniques. Select a limited number of questions to analyze your communications from your customer’s point of view. Ask: What are your impressions of our communications? What do you think of our graphics, identity pieces, Web site and other marketing materials? How could we improve our communications? Remember the saying, “a complaint is a gift.” (This is the title of Janelle Barlow and Claus Moller’s classic, highly recommended book about responding to customer feedback.)
 

Step 5: Look outward: Query your community.
What does the community know and perceive about your organization? Take a broader look at the impact of your communications. Again, ask questions to reveal public perceptions. This can be achieved by hiring a research firm or an objective person to conduct a formal community survey or by informally interviewing community members.
 

Step 6: Look inward: Query your staff and volunteers.
Don’t forget your internal audiences. Collect their opinions about your communications. Ask: What are your reactions to communications during the past year? What was effective? What wasn’t? What could be improved? Did internal documents serve your needs? What future communications could help you function as part of the organization? You will need to determine if all communications were understood by all internal audiences. And examine how your internal audiences present your organization to the public. Do all employees have an accurate, consistent “elevator speech” about your organization? Do you speak as one voice?
 

Step 7: Analyze your media coverage.
Keep all your press coverage in a media binder. This can include television and radio tapes and/or transcripts and Web coverage. As in Step 3, spread your media coverage around a table. Include articles and paid ads. Look at the frequency and reach of your coverage. What is the tone and impact? Are your key messages being promoted? Are your audiences being reached? What media opportunities have you missed? To oversee coverage, contract with a news monitoring service or use Google’s free Media Alerts to track your coverage in the press, blogs and Web sites.
 

Step 8: Conduct a SWOT (strengths, weaknesses, opportunities, threats) analysis.
Pull your data together from the previous steps. Do a SWOT analysis of your communications using a simple stages

STRENGTHS

WEAKNESSES
OPPORTUNITIES
THREATS

Analyze how you can capitalize on strengths, stop weaknesses, maximize opportunities and defend against threats.
 

Step 9: Think like a communications consultant.
Based on your findings, what would you recommend to yourself for future communications? Select a team to help you analyze your audit results and strategize about future actions.
 

Step 10: Put together a plan for future communications.
Use your research as the starting point for creating a Communications Plan for your organization. Either create the plan internally, or hire a professional to design and implement your plan.

Bank Reconciliation statement (Format) :-

PREPARATION OF BANK RECONCILIATION STATEMENT :-

To reconcile the bank balance as shown in the pass book with the balance shown by the cash book, Bank Reconciliation Statement is prepared. After identifying the reasons of difference, the Bank Reconciliation statement is prepared without making change in the cash book balance. We may have the following different situations with regard to balances while preparing the Bank Reconciliation statement. These are:

1. Favourable balances

(a) Debit balance as per cash book is given and the balance as per pass book is to be ascertained.

(b) Credit balance as per pass book is given and the balance as per cash book is to be ascertained.

2. Unfavourable balance/overdraft balance

(a) Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book is to be ascertained.

(b) Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book is to be ascertained.

The following steps are taken to prepare the bank reconciliation statement:

(i) Favourable balances : When debit balance as per cash book or credit balance as per pass book is given :

(a) Take balance as a starting point say Balance as per Cash Book.

(b) Add all transactions that have resulted in increasing the balance of the pass book.

(c) Deduct all transactions that have resulted in decreasing the balance of pass book.

(d) Extract the net balance shown by the statement which should be the same as shown in the pass book.

In case balance as per pass book is taken as starting point all transactions that have resulted in increasing the balance of the Cash book will be added and all transactions that have resulted in decreasing the balance of Cash book will be deducted. Now extract the net balance shown by the statement which should be the same as per the Cash book.

REASONS FOR DIFFERENCE (BRS) :-

When a businessman compares the Bank balance of its cash book with the balance shown by the bank pass book, there is often a difference. As the time period of posting the transactions in the bank column of cash book does not correspond with the time period of posting in the bank pass book of the firm, the difference arises. The reasons for difference in balance of the cash book and pass book are as under :

1. Cheques issued by the firm but not yet presented for payment

When cheques are issued by the firm, these are immediately entered on the credit side of the bank column of the cash book. Sometimes, receiving person may present these cheques to the bank for payment on some later date. The bank will debit the firm’s account when these cheques are presented for payment. There is a time period between the issue of cheque and being presented in the bank for payment. This may cause difference to the balance of cash book and pass book.

2. Cheques deposited into bank but not yet collected

When cheques are deposited into bank, the firm immediately enters it on the debit side of the bank column of cash book. It increases the bank balance as per the cash book. But, the bank credits the firm’s account after these cheques are actually realised. A few days are taken in clearing of local cheques and in case of outstation cheques few more days are taken. This may cause the difference between cash book and pass book balance.

3. Amount directly deposited in the bank account

Sometimes, the debtors or the customers deposit the money directly into firm’s bank account, but the firm gets the information only when it receives the bank statement. In this case, the bank credits the firm’s account with the amount received but the same amount is not recorded in the cash book. As a result the balance in the cash book will be less than the balance shown in the Pass book.

4. Bank Charges

The bank charge in the form of fees or commission is charged from time to time for various services provided from the customers’ account without the intimation to the firm. The firm records these charges after receiving the bank intimation or statement. Example of such deductions is : Interest on overdraft balance, credit cards’ fees, outstation cheques, collection charges, etc. As a result, the balance of the cash book will be more than the balance of the pass book.

5. Interest and dividend received by the bank

Sometimes, the interest on debentures or dividends on shares held by the account holder is directly deposited by the company through Electronic Clearing System (ECS). But the firm does not get the information till it receives the bank statement. As a consequence, the firm enters it in its cash book on a date later than the date it is recorded by the bank. As a result, the balance as per cash book and pass book will differ.

6. Direct payments made by the bank on behalf of the customers

Sometimes, bank makes certain payments on behalf of the customer as per standing instructions. Telephone bills, rent, insurance premium, taxes, etc are some of the expenses. These expenses are directly paid by the bank and debited to the firm’s account immediately after their payment. but the firm will record the same on receiving information from the bank in the form of Pass Book or bank statement. As a result, the balance of the pass book is less than that of the balance shown in the bank column of the cash book.

7. Dishonour of Cheques/Bill discounted

If a cheque deposited by the firm or bill receivable discounted with the bank is dishonoured , the same is debited to firm’s account by the bank. But the firm records the same when it receives the information from the bank. As a result, the balance as per cash book and that of pass book will differ.

8. Errors committed in recording transactions by the firm

There may be certain errors from firm’s side, e.g., omission or wrong recording of transactions relating to cheques deposited, cheques issued and wrong balancing etc. In this case, there would be a difference between the balances as per Cash Book and as per Pass Book.

9. Errors committed in recording transactions by the Bank

Sometimes, bank may also commit errors, e.g., omission or wrong recording of transactions relating to cheques deposited etc. As a result, the balance of the bank pass book and cash book will not agree.

Need of preparing Bank Reconciliation Statement :-

It is neither compulsory to prepare Bank Reconciliation Statement nor a date is fixed on which it is to be prepared. It is prepared from time to time to check that all transactions relating to bank are properly recorded by the businessman in the bank column of the cash book and by the bank in its ledger account. Thus, it is prepared to reconcile the bank balances shown by the cash book and by the bank statement. It helps in detecting, if there is any error in recording the transactions and ascertaining the correct bank balance on a particular date.

MEANING OF BANK RECONCILIATION STATEMENT :-

Business concern maintains the cash book for recording cash and bank transactions. The Cash book serves the purpose of both the cash account and the bank account. It shows the balance of both at the end of a period. Bank also maintains an account for each customer in its book. All deposits by the customer are recorded on the credit side of his/her account and all withdrawals are recorded on the debit side of his/her account. A copy of this account is regularly sent to the customer by the bank. This is called ‘Pass Book’ or Bank statement. It is usual to tally the firm’s bank transactions as recorded by the bank with the cash book. But sometimes the bank balances as shown by the cash book and that shown by the pass book/bank statement do not match. If the balance shown by the pass book is different from the balance shown by bank column of cash book, the business firm will identify the causes for such difference. It becomes necessary to reconcile them. To reconcile the balances of Cash Book and Pass Book a statement is prepared. This statement is called the ‘Bank Reconciliation Statement. It can be said that :

 Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances as per the bank column of the cash book and pass book on any given date

BANK RECONCILIATION STATEMENT :-

You operate a bank account in which you deposit money and withdraw money from time to time. You maintain a record with yourself of these deposits and withdrawals. One day you get your pass-book (statement issued by the bank) updated but are surprised to find that the balance shown by the pass book was different from what it should have been as per your records. What will you do in this case? It is obvious that you will compare the two sets of records and find out items which are recorded in one but not in the other. Similar situation may arise in case of a business concern which operates a bank account. These business concerns maintain record of all of their banking transactions in their bank column of the cash book. On any particular date the bank balance shown by the bank column cash book and that shown by the pass book should be the same. But if there is difference between the two, the business concern will find out the reasons to reconcile the balance. In this lesson you will learn about reasons for difference and prepare the reconciliation statement called Bank Reconciliation Statement.

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING :-

Importance of Cost accounting :-

The limitation of financial accounting has made the management to realize the importance of cost accounting. The importance of cost accounting are as follows:

1. Importance to Management

Cost accounting provides invaluable help to management. It is difficult to indicate where the work of cost accountant ends and managerial control begins. The advantages are as follows :

a. Helps in ascertainment of cost

Cost accounting helps the management in the ascertainment of cost of process, product, Job, contract, activity, etc., by using different techniques such as Job costing and Process costing.

b. Aids in Price fixation

By using demand and supply, activities of competitors, market condition to a great extent, also determine the price of product and cost to the producer does play an important role. The producer can take necessary help from his costing records.

c. Helps in Cost reduction

Cost can be reduced in the long-run when cost reduction programme and improved methods are tried to reduce costs.

d. Elimination of wastage

As it is possible to know the cost of product at every stage, it becomes possible to check the forms of waste, such as time and expenses etc., are in the use of machine equipment and material.

e. Helps in identifying unprofitable activities

With the help of cost accounting the unprofitable activities are identified, so that the necessary correct action may be taken.

f. Helps in checking the accuracy of financial account

Cost accounting helps in checking the accuracy of financial account with the help of reconciliation of the profit as per financial accounts with the profit as per cost account.

g. Helps in fixing selling Prices

It helps the management in fixing selling prices of product by providing detailed cost information.

i. Helps in Inventory Control

Cost furnishes control which management requires in respect of stock of material, work in progress and finished goods.

j. Helps in estimate

Costing records provide a reliable basis upon which tender and estimates may be prepared.

2. Importance to Employees

Worker and employees have an interest in which they are employed. An efficient costing system benefits employees through incentives plan in their enterprise, etc. As a result both the productivity and earning capacity increases.

3. Cost accounting and creditors

Suppliers, investor’s financial institution and other moneylenders have a stake in the success of the business concern and therefore are benefited by installation of an efficient costing system. They can base their judgement about the profitability and prospects of the enterprise upon the studies and reports submitted by the cost accountant.

4. Importance to National Economy

An efficient costing system benefits national economy by stepping up the government revenue by achieving higher production. The overall economic developments of a country take place due to efficiency of production.

5. Data Base for operating policy

Cost Accounting offers a thoroughly analysed cost data which forms the basis of formulating policy regarding day to day business, such as:

LIMITATIONS OF COST ACCOUNTING :-

Like other branches of accounting, cost accounting is not an exact science but is an art which has developed through theories and accounting practices based on reasoning and common sense. These practices are not static but changing with time. Cost accounting lacks a uniform procedure. There is no stereotyped system of cost accounting applicable to all industries. There are widely recognised cost concepts but understood and applied differently by different industries. Cost accounting can be used only by big enterprises.

The limitations of cost accounting are as follows:
 
* It is expensive because analysis, allocation and absorption of overheads require considerable amount of additional work.
 
*The results shown by cost accounts differ from those shown by financial accounts. Preparation of reconciliation statements frequently is necessary to verify their accuracy. This leads to unnecessary increase in workload.

 
*It is unnecessary because it involves duplication of work. Some
industrial units are functioning efficiently without any costing system.
 
*Costing system itself does not control costs. If the management is alert and efficient, it can control cost without the help of the cost accounting.Therefore it is unnecessary.

Objectives of cost accounting :-

There is a relationship among information needs of management, cost accounting objectives, and techniques and tools used for analysis in cost accounting. Cost accounting has the following main objectives to serve:
 

1. Determining selling price,
2. Controlling cost
3. Providing information for decision-making
4. Ascertaining costing profit
5. Facilitating preparation of financial and other statements.
 

1. Determining selling price
The objective of determining the cost of products is of main importance in cost accounting. The total product cost and cost per unit of product are important in deciding selling price of product. Cost accounting provides information regarding the cost to make and sell product or services. Other factors such as the quality of product, the condition of the market, the area of distribution, the quantity which can be supplied etc., are also to be given consideration by the management before deciding the selling price, but the cost of product plays a major role.
 

2. Controlling cost
Cost accounting helps in attaining aim of controlling cost by using various techniques such as Budgetary Control, Standard costing, and inventory control. Each item of cost [viz. material, labour, and expense] is budgeted at the beginning of the period and actual expenses incurred are compared with the budget. This increases the efficiency of the enterprise.
 

3. Providing information for decision-making
Cost accounting helps the management in providing information for managerial decisions for formulating operative policies. These policies relate to the following matters:
(i) Determination of cost-volume-profit relationship.
(ii) Make or buy a component
(iii) Shut down or continue operation at a loss
(iv) Continuing with the existing machinery or replacing them by improved and economical machines. 

4. Ascertaining costing profit
Cost accounting helps in ascertaining the costing profit or loss of any activity on an objective basis by matching cost with the revenue of the activity.

5. Facilitating preparation of financial and other statements
Cost accounting helps to produce statements at short intervals as the management may require. The financial statements are prepared generally once a year or half year to meet the needs of the management. In order to operate the business at high efficiency, it is essential for management to have a review of production, sales and operating results. Cost accounting provides daily, weekly or monthly statements of units produced, accumulated cost with analysis. Cost accounting system provides immediate information regarding stock of raw material, semifinished and finished goods. This helps in preparation of financial statements.

SCOPE OF COST ACCOUNTING :-

The terms ‘costing’ and ‘cost accounting’ are many times used interchangeably. However, the scope of cost accounting is broader than that of costing. Following functional activities are included in the scope of cost accounting:

1. Cost book-keeping: It involves maintaining complete record of all costs incurred from their incurrence to their charge to departments, products
and services. Such recording is preferably done on the basis of double entry system.
2. Cost system: Systems and procedures are devised for proper accounting for costs.
3. Cost ascertainment: Ascertaining cost of products, processes, jobs, services, etc., is the important function of cost accounting. Cost ascertainment becomes the basis of managerial decision making such as pricing, planning and control.
4. Cost Analysis: It involves the process of finding out the causal factors of actual costs varying from the budgeted costs and fixation of
responsibility for cost increases.

5. Cost comparisons: Cost accounting also includes comparisons between cost from alternative courses of action such as use of technology for production, cost of making different products and activities, and cost of same product/ service over a period of time.
6. Cost Control: Cost accounting is the utilisation of cost information for exercising control. It involves a detailed examination of each cost in the light of benefit derived from the incurrence of the cost. Thus, we can state that cost is analysed to know whether the current level of costs is satisfactory in the light of standards set in advance.
7. Cost Reports: Presentation of cost is the ultimate function of cost accounting. These reports are primarily for use by the management at different levels. Cost Reports form the basis for planning and control, performance appraisal and managerial decision making.

MEANING OF COST ACCOUNTING :-

Cost accounting is the process of determining and accumulating the cost of product or activity. It is a process of accounting for the incurrence and the control of cost. It also covers classification, analysis, and interpretation of cost. In other words, it is a system of accounting, which provides the information about the ascertainment, and control of costs of products, or services. It measures the operating efficiency of the enterprise. It is an internal aspect of the organisation. Cost Accounting is accounting for cost aimed at providing cost data, statement and reports for the purpose of managerial decision making. The Institute of Cost and Management Accounting, London defines “Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In the widest usage, it embraces the preparation of statistical data, application of cost control methods and the ascertainment of profitability of activities carried out or planned”.
             Costing includes “the techniques and processes of ascertaining costs.” The ‘Technique’ refers to principles which are applied for ascertaining costs of products, jobs, processes and services. The `process’ refers to day to day routine of determining costs within the method of costing adopted by a business enterprise. 
             Costing involves “the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services; the relation of these costs to sales value; and the ascertainment of profitability”.

Indirect Method Cash Flow Statement Specimen (Detailed) :-

Direct Method Cash Flow Statement Specimen (Detailed) :-

Economic Entity in Cash Flow Statement :-

1. The term “economic entity” is used in this Standard to define, for financial reporting purposes, a group of entities comprising the controlling entity and any controlled entities.

2. Other terms sometimes used to refer to an economic entity include “administrative entity,” “financial entity,” “consolidated entity” and “group.”

3. An economic entity may include entities with both social policy and commercial objectives. For example, a government housing department may be an economic entity which includes entities that provide housing for a nominal charge, as well as entities that provide accommodation on a commercial basis.

Foreign Currency Cash Flows :-

1. Cash flows arising from transactions in a foreign currency should be recorded in an entity’s reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow.
2. The cash flows of a foreign controlled entity should be translated at the exchange rates between the reporting currency and the foreign currency at the dates of the cash flows.
3. Cash flows denominated in a foreign currency are reported in a manner consistent with IPSAS 4, “The Effects of Changes in Foreign Exchange Rates.” This permits the use of an exchange rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used for recording foreign currency transactions or the translation of the cash flows of a foreign controlled entity. IPSAS 4 does not permit the use of the exchange rate at reporting date when translating the cash flows of a foreign controlled entity.

reported in the cash flow statement in order to reconcile cash and cash4. Unrealized gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at end of period exchange rates.

Investing Activities in Cash flow statement :-

1. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which cash outflows have been made for resources which are intended to contribute to the entity’s future service delivery. Examples of cash flows arising from investing activities are:
(a) Cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalized development costs and self-constructed property, plant and equipment;
(b) Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
(c) Cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes);
(d) Cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(e) Cash advances and loans made to other parties (other than advances and loans made by a public financial institution);
(f) Cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a public financial institution);
(g) Cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
(h) Cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as
financing activities.

When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged.

Operating Activities(Details) :-

1. The amount of net cash flows arising from operating activities is a key indicator of the extent to which the operations of the entity are funded:
(a) By way of taxes (directly and indirectly); or
(b) From the recipients of goods and services provided by the entity.
The amount of the net cash flows also assists in showing the ability of the entity to maintain its operating capability, repay obligations, pay a dividend to its owner and make new investments without recourse to external sources of financing. The consolidated whole-of-government operating cash flows provide an indication of the extent to which a government has financed its current activities through taxation and charges. Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows.

2. Cash flows from operating activities are primarily derived from the principal cash-generating activities of the entity. Examples of cash flows from operating activities are:
(a) Cash receipts from taxes, levies and fines;
(b) Cash receipts from charges for goods and services provided by the entity;
(c) Cash receipts from grants or transfers and other appropriations or other budget authority made by central government or other public sector entities;
(d) Cash receipts from royalties, fees, commissions and other revenue;
(e) Cash payments to other public sector entities to finance their operations (not including loans);
(f) Cash payments to suppliers for goods and services;
(g) Cash payments to and on behalf of employees;
(h) Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits;
(i) Cash payments of local property taxes or income taxes (where appropriate) in relation to operating activities;
(j) Cash receipts and payments from contracts held for dealing or trading purposes;
(k) Cash receipts or payments from discontinuing operations; and
(l) Cash receipts or payments in relation to litigation settlements. Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of net surplus or deficit. However, the cash flows relating to such transactions are cash flows from investing activities.

3. An entity may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by public financial institutions are usually classified as operating activities since they relate to the main cashgenerating activity of that entity. 

4. In some jurisdictions, governments or other public sector entities will appropriate or authorize funds to entities to finance the operations of an entity and no clear distinction is made for the disposition of those funds between current activities, capital works and contributed capital. Where an entity is unable to separately identify appropriations or budgetary authorizations into current activities, capital works and contributed capital, the appropriation or budget authorization should be classified as cash flows from operations and this fact should be disclosed in the notes to the financial statements.

Cash and Cash Equivalents :-

1. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in
value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents.
 

2. Bank borrowings are generally considered to be financing activities. However, in some countries, bank overdrafts which are repayable on demand form an integral part of an entity’s cash management. In these circumstances, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.
 

3. Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an entity rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.

Definitions Of Cash Flow Statement :-

1. The following terms are used in this Standard with the meanings specified:

Accrual basis means a basis of accounting under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognized in the financial statements of the periods to which they relate. The elements recognized under the accrual basis are assets, liabilities, net assets/equity, revenue and expenses.

Assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity.

Associate is an entity in which the investor has significant influence and which is neither a controlled entity nor a joint venture of the investor. 

Cash comprises cash on hand and demand deposits.

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. 

Cash flows are inflows and outflows of cash and cash equivalents. 

Contributions from owners means future economic benefits or service potential that has been contributed to the entity by parties external to the entity, other than those that result in liabilities of the entity, that establish a financial interest in the net assets/equity of the entity, which:
(a) Conveys entitlement both to distributions of future economic benefits or service potential by the entity during its life, such distributions being at the discretion of the owners or their
representatives, and to distributions of any excess of assets over liabilities in the event of the entity being wound up; and/or
(b) Can be sold, exchanged, transferred or redeemed. 

Control is the power to govern the financial and operating policies of another entity so as to benefit from its activities.

Controlled entity is an entity that is under the control of another entity (known as the controlling entity).

Controlling entity is an entity that has one or more controlled entities. 

Cost method is a method of accounting whereby the investment is recorded at cost. The statement of financial performance reflects revenue from the investment only to the extent that the investor receives distributions from accumulated net surpluses of the investee arising subsequent to the date of acquisition.

Distributions to owners means future economic benefits or service potential distributed by the entity to all or some of its owners, either as a return on investment or as a return of investment.

Benefits of Cash Flow Information :-

1. Information about the cash flows of an entity is useful in assisting users to predict the future cash requirements of the entity, its ability to generate cash flows in the future and to fund changes in the scope and nature of its activities. A cash flow statement also provides a means by which an entity
can discharge its accountability for cash inflows and cash outflows during the reporting period.

2. A cash flow statement, when used in conjunction with other financial statements, provides information that enables users to evaluate the changes in net assets/equity of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. It also
enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and other events.

3. Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows.

Scope Of Cash Flow Statements :-

1. An entity which prepares and presents financial statements under the accrual basis of accounting should prepare a cash flow statement in accordance with the requirements of this Standard and should present it as an integral part of its financial statements for each period for which financial statements are presented.
2. Information about cash flows may be useful to users of an entity’s financial statements in assessing the entity’s cash flows, assessing the entity’s compliance with legislation and regulations (including authorized budgets where appropriate) and for making decisions about whether to provide resources to, or enter into transactions with an entity. They are generally interested in how the entity generates and uses cash and cash equivalents. This is the case regardless of the nature of the entity’s activities and irrespective of whether cash can be viewed as the product of the entity, as may be the case with a public financial institution. Entities need cash for essentially the same reasons, however different their principal revenue producing activities might be. They need cash to pay for the goods and services they consume, to meet ongoing debt servicing costs, and, in some cases, to reduce levels of debt. Accordingly, this Standard requires all entities to present a cash flow statement.
3. This Standard applies to all public sector entities other than Government Business Enterprises.
4. Government Business Enterprises (GBEs) are required to comply with International Accounting Standards (IASs) issued by the International Accounting Standards Committee. The Public Sector Committee’s Guideline No. 1, “Financial Reporting by Government Business Enterprises” notes that IASs are relevant to all business enterprises, regardless of whether they are in the private or public sector. Accordingly, Guideline No. 1 recommends that GBEs should present financial statements that conform, in all material respects, to IASs.

Objective The cash flow statement :-

The cash flow statement identifies the sources of cash inflows, the items on which cash was expended during the reporting period, and the cash balance as at the reporting date. Information about the cash flows of an entity is useful in providing users of financial statements with information for both accountability and decision making purposes. Cash flow information allows users to ascertain how a public sector entity raised the cash it required to fund its activities and the manner in which that cash was used. In making and evaluating decisions about the allocation of resources, such as the sustainability of the entity’s activities, users require an understanding of the timing and certainty of cash flows. The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

The cash flow from Operating Activities :-

o The cash flow from operating activities section of a cash flow statement can be presented using the direct format or the indirect format. The bottom line is the same, but the two begin at different points. Companies are free to use either format. Below is an example of both formats.
o Direct method: shows how much cash came in for sales and how much cash went out for inventory and other operating expenditures.
o Indirect method: starts with net income as a figure that summarizes most of the cash transactions for operating activities in a firm. However, net income also includes transactions that ere not cash, so we must eliminate the non-cash transactions from the net income figure to arrive at an accurate presentation of cash flow from operating activities.

Specimen Of Cash Flow Statement :-

Format of the Cash Flow Statement :-

• The cash flow statement is divided into three sections:
o Cash flow from operating activities: shows the results of cash inflows and outflows related to the fundamental operations of the basic line or lines of business in which the company engages. (Example: cash receipts from the sale of goods or services and cash outflows for purchasing inventory and paying rent and taxes.)
o Cash flow from investing activities: associated with purchases and sales of non-current assets (Example: building and equipment purchases or sales of investments or subsidiaries.)
o Cash flow from financing activities: associated with financing the firm (Example: selling and paying off bonds and issuing stock and paying dividends)

• Exceptions
o Short-term marketable securities are treated as long-term investments and appear in cash flow from investing activities
o Short-term debt is treated as long-term debt and appears in cash flow from financing activities
o Although dividends are handled as a cash outflow in the cash flow from financing activities section, interest payments are considered an operating outflow, despite the fact that both are payments to outsiders for using their money.

CASH FLOW STATEMENTS :-

Cash flow statement may provide considerable information about what is really happening in a business beyond that contained in either the income statement or the balance sheet. Analyzing this statement should not present an intimidating task, instead it will quickly become obvious that the benefits of understanding the sources and uses of a company’s cash far outweigh the costs of undertaking some very straightforward analyses.