Skip to content

CA Intermediate · Advanced Accounting · AS 3 Cash Flow Statement

Sundaram Textiles Ltd. holds a fixed deposit with a bank that it purchased during the year. The deposit has an original maturity of 6 months from the date of purchase, and the company bought it to earn interest on surplus funds. Under AS 3, how should the deposit be treated in the Cash Flow Statement?

The deposit is not a cash equivalent because AS 3 requires an original maturity of three months or less from acquisition. With a six-month maturity, its purchase is shown as a cash outflow under investing activities, not as a cash equivalent movement.

  1. AAs cash equivalent because it is a short-term, highly liquid investment, so purchase causes no cash flow
  2. BAs cash equivalent only if the maturity is 3 months or less from the date of acquisition; here it is an investing activityCorrect
  3. CAs an operating activity because interest is earned on it
  4. DAs a financing activity because it relates to bank funds

Explanation

AS 3 treats an investment as a cash equivalent only when it has a short maturity, normally three months or less from the date of acquisition. A 6-month deposit does not qualify, so its purchase is a cash outflow from investing activities. Option A is wrong because the 3-month test is not met.

Did you get it right without looking?

One question tells you little. A timed set on AS 3 Cash Flow Statement shows your real accuracy, how long you take and where you lose marks.

Practise AS 3 Cash Flow StatementFree diagnostic mock

More AS 3 Cash Flow Statement questions