Treatment of Some Peculiar Items

Extraordinary Items

Extraordinary items are events or transactions that are clearly distinct from the ordinary activities of the enterprise and are not expected to recur frequently or regularly. Examples include a loss due to theft, earthquake, or flood.

Because these items are non-recurring, the cash flows they generate must be classified separately under the appropriate activity heading — operating, investing, or financing — and disclosed distinctly in the cash flow statement. This separate disclosure helps users understand the nature of these unusual cash flows and assess their effect on both present and future cash flows of the enterprise.

Interest and Dividend

The classification of interest and dividend depends on whether the enterprise is a financial enterprise or a non-financial enterprise.

For a financial enterprise (whose main business is lending and borrowing):

• Interest paid, interest received, and dividend received are classified as operating activities.
• Dividend paid is classified as a financing activity.

For a non-financial enterprise, as per AS-3:

• Payment of interest and dividends are classified as financing activities.
• Receipt of interest and dividends are classified as investing activities.

Taxes on Income and Gains

Taxes can be of various types: income tax (on normal profit), capital gains tax (on capital profits), and dividend tax (on the amount distributed as dividend to shareholders).

AS-3 requires that cash flows arising from taxes on income should be separately disclosed and classified as cash flows from operating activities, unless they can be specifically identified with financing or investing activities. This leads to the following treatment:

• Tax on operating profit → classified as operating cash flows.
• Dividend tax (tax paid on dividend) → classified as a financing activity (along with the dividend paid).
• Capital gains tax paid on sale of fixed assets → classified under investing activities.

Non-cash Transactions

As per AS-3, investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement.

Examples of such non-cash transactions:

• Acquisition of machinery by issue of equity shares.
• Redemption of debentures by issue of equity shares.

Because these transactions do not involve any cash inflow or outflow, they are not shown in the cash flow statement. However, they must be disclosed elsewhere in the financial statements in a way that provides all relevant information about these investing and financing activities.

The textbook's own "Test your Understanding – I" classification exercise now lives in this chapter's Illustrations & practice tab, alongside its answer key.

Cash Flow Statement (Main Heads Only) …