In India, which of the following, Accounting Standard (AS) is related to Cash Flow Statement?

Question

Accepted Answer

The correct option is 2:
The correct Accounting Standard in India that deals with the preparation and presentation of a Cash Flow Statement is **AS-3 (Cash Flow Statements)**. This standard is mandatory for certain classes of enterprises and aims to provide information about the changes in cash and cash equivalents of an enterprise over a period of time, classifying the cash flows into three primary activities: Operating, Investing, and Financing. By segregating cash movements into these core business categories, AS-3 helps users of financial statements assess the firm’s ability to generate cash and its needs to utilise those cash flows. It also permits companies to choose between the direct or indirect method for reporting cash flows from operating activities, thereby improving the relevance and reliability of the overall financial reporting.

The incorrect option is 1:
Option 1, **AS-1**, is incorrect because it relates to the **Disclosure of Accounting Policies**. AS-1 requires the disclosure of significant accounting policies adopted in preparing and presenting financial statements. Its purpose is to ensure that the fundamental accounting assumptions—going concern, consistency, and accrual—are adhered to and that the chosen policies are clearly stated. This makes it a foundational standard applicable to all financial statements, but it does not prescribe the format or content of the Cash Flow Statement.

The incorrect option is 3:
Option 3, **AS-4**, is incorrect as it governs **Contingencies and Events Occurring After the Balance Sheet Date**. This standard prescribes the accounting treatment and disclosures regarding events that take place between the date of the balance sheet and the date on which the financial statements are approved. Such events may be adjusting (requiring balance sheet changes) or non-adjusting (requiring disclosure). It deals with post-reporting date occurrences and is not related to the flow of cash during the accounting period.

The incorrect option is 4:
Option 4, **AS-2**, is incorrect because this standard covers the **Valuation of Inventories**. AS-2 lays down the principles for determining the value at which inventories should be carried in the balance sheet, ensuring that inventory is valued at the lower of cost and net realisable value. While inventory changes impact working capital, the standard itself is concerned with the measurement of a balance sheet asset and not with the structure or presentation of a Cash Flow Statement.