CA Foundation doubt
Why is there a difference in treatment between cashflow of a financial entity and non financial entity?
Why is there a difference in treatment between cashflow of a financial entity and non financial entity?
Asked by Mahima··2 answers
BrunoAI answerAI first answer — verify with your teacher
Because AS 3 classifies cash flows by an entity's main business. For a bank or NBFC, lending, borrowing and investing are its core revenue-producing activity. For other businesses, they are only side activities. 1. Financial entity: interest paid, interest received and dividends received are all Operating activities. 2. Non-financial entity: interest and dividends received are Investing; interest paid is Financing. 3. Dividends paid are Financing for both. Example: for a bank, interest earned on loans is like sales revenue for a trader. Note: AS 3 Cash Flow Statement is mainly in the CA Inter syllabus, so check the latest ICAI study material.
Veer
Dono ke cash flow treatment me farq isliye hai kyunki dono ka main business (core operation) alag hota hai. • Non-Financial Entity: Inka main kaam goods/services bechna hai, isliye loan aur interest inke liye Investing/Financing hai. • Financial Entity (Banks): Inka main kaam hi paisa lena-dena hai, isliye interest aur loans inke liye Operating hai.
Lending money is a bank's main business, so interest earned on loans is like sales revenue for a trader and falls under operating activities.
Dividend paid is shown under financing activities, whether the entity is financial or non-financial.
For a non-financial entity, interest paid is a cost of raising funds and is shown under financing activities.
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