Part 2 Chapter 6 Cash Flow Statement Class 12 NCERT

What a Cash Flow Statement Really Shows

A Cash Flow Statement is a statement showing inflows and outflows of cash and cash equivalents during a period. It is prepared under AS-3 and divides cash movements into operating, investing and financing activities. Unlike a Statement of Profit and Loss, it ignores accrual profit unless that profit has a cash effect. For example, depreciation reduces accounting profit but no cash leaves the business, so it is added back while calculating cash flow from operations. Similarly, an increase in debtors means sales were recorded but cash is still pending, so it reduces operating cash flow. The core skill in this chapter is to convert accounting information into actual cash movement.

Key Terms You Must Know

Cash

Cash includes cash in hand and demand deposits with banks that can be used immediately.

Cash equivalents

Short-term, highly liquid investments that are readily convertible into known amounts of cash and carry insignificant risk of change in value.

Operating activities

Principal revenue-producing activities of the enterprise, such as cash received from customers and cash paid to suppliers, employees and operating expenses.

Investing activities

Activities related to purchase and sale of long-term assets and investments, such as purchase of machinery or sale of land.

Financing activities

Activities that change the size or composition of owners capital and borrowings, such as issue of shares, redemption of debentures and payment of dividend.

Non-cash items

Items recorded in accounts without immediate cash movement, such as depreciation, amortisation, provision and writing off goodwill.

How to Prepare a Cash Flow Statement in CBSE Format

1. Step 1: Start with profit before tax and extraordinary items — For operating activities by the indirect method, begin with net profit before tax. If the question gives profit after tax, adjust tax provision carefully to arrive at the correct base.
2. Step 2: Adjust non-cash and non-operating items — Add back depreciation, amortisation, loss on sale of assets and finance cost if deducted. Deduct profit on sale of assets, interest received and dividend received because these belong to investing or financing classification, not operating profit.
3. Step 3: Adjust current assets and current liabilities — Increase in current assets is deducted and decrease is added. Increase in current liabilities is added and decrease is deducted. This converts accrual profit into cash generated from operations.
4. Step 4: Deduct income tax paid — Tax paid is generally treated as operating cash outflow unless it is specifically related to investing or financing activity. Use opening and closing provision for tax if the actual tax paid is not directly given.
5. Step 5: Prepare investing and financing sections — Record actual cash paid or received for fixed assets, investments, shares, debentures, loans, interest, dividend and redemption. Non-cash transactions, such as issue of shares for purchase of machinery, are not included in the Cash Flow Statement.

Worked Examples with Steps

• Example 1: Cash flow from operating activities. Net profit before tax is Rs 1,20,000. Depreciation Rs 20,000, loss on sale of machinery Rs 5,000, profit on sale of investment Rs 8,000. Inventory increased by Rs 15,000, trade receivables decreased by Rs 10,000, trade payables increased by Rs 12,000 and tax paid Rs 18,000. Step 1: Adjust profit for non-cash and non-operating items: 1,20,000 + 20,000 + 5,000 - 8,000 = Rs 1,37,000. Step 2: Adjust working capital: subtract inventory increase Rs 15,000, add receivables decrease Rs 10,000, add payables increase Rs 12,000. Cash generated from operations = 1,37,000 - 15,000 + 10,000 + 12,000 = Rs 1,44,000. Step 3: Deduct tax paid Rs 18,000. Net cash from operating activities = Rs 1,26,000.
• Example 2: Cash flow from investing activities. Opening machinery at cost is Rs 3,00,000, closing machinery at cost is Rs 4,50,000 and machinery costing Rs 50,000 was sold for Rs 32,000. Step 1: Find machinery purchased using cost account logic: Opening machinery + purchases - cost of machinery sold = closing machinery. So 3,00,000 + purchases - 50,000 = 4,50,000. Purchases = Rs 2,00,000. Step 2: Purchase of machinery is cash outflow Rs 2,00,000. Step 3: Sale proceeds of machinery are cash inflow Rs 32,000. Net cash used in investing activities = 32,000 - 2,00,000 = Rs 1,68,000 outflow.
• Example 3: Cash flow from financing activities. A company issued equity shares for cash Rs 2,50,000, raised a bank loan Rs 1,00,000, redeemed debentures Rs 80,000, paid interest on debentures Rs 12,000 and paid dividend Rs 25,000. Step 1: Issue of shares is financing inflow Rs 2,50,000. Step 2: Bank loan raised is financing inflow Rs 1,00,000. Step 3: Redemption of debentures, interest paid and dividend paid are financing outflows in CBSE treatment. Net cash from financing activities = 2,50,000 + 1,00,000 - 80,000 - 12,000 - 25,000 = Rs 2,33,000 inflow.

Common Mistakes and Board Exam Tips

• Do not treat depreciation as a cash outflow. It is added back in operating activities because it reduced profit without reducing cash.
• Remember the working capital rule: increase in current asset is minus, decrease is plus; increase in current liability is plus, decrease is minus.
• Profit on sale of fixed asset is deducted from operating profit, but sale proceeds of that asset are shown under investing activities.
• Dividend paid is normally a financing outflow for non-financial companies in Class 12 Accountancy questions.
• Bank overdraft treatment depends on the question. If it is part of cash management and payable on demand, it may be included in cash and cash equivalents; otherwise handle as financing or current liability as instructed.
• Non-cash transactions are disclosed separately if required, but they are not included in the three cash flow totals.

Direct Method vs Indirect Method for Operating Activities

Practice Questions with Solutions

• Q: Classify the following into operating, investing or financing activities for a non-financial company: cash received from customers, purchase of patent, issue of debentures, dividend paid, sale of furniture.
  A: Step 1: Cash received from customers arises from main business revenue, so it is operating.
  Step 2: Purchase of patent and sale of furniture relate to long-term assets, so both are investing activities.
  Step 3: Issue of debentures changes borrowings and dividend paid relates to return to shareholders, so both are financing activities.
  Final answer: Operating: cash received from customers. Investing: purchase of patent, sale of furniture. Financing: issue of debentures, dividend paid.

• Q: Calculate cash flow from operating activities. Net profit before tax is Rs 90,000. Depreciation Rs 15,000, interest paid Rs 6,000, dividend received Rs 4,000. Current assets increased by Rs 20,000 and current liabilities increased by Rs 9,000. Tax paid Rs 10,000.
  A: Step 1: Start with net profit before tax Rs 90,000.
  Step 2: Add back depreciation Rs 15,000 and interest paid Rs 6,000 because they were deducted but are not operating cash adjustments here.
  Step 3: Deduct dividend received Rs 4,000 because it is investing income.
  Step 4: Adjust working capital: deduct increase in current assets Rs 20,000 and add increase in current liabilities Rs 9,000.
  Step 5: Cash generated from operations = 90,000 + 15,000 + 6,000 - 4,000 - 20,000 + 9,000 = Rs 96,000. Deduct tax paid Rs 10,000.
  Final answer: Net cash from operating activities = Rs 86,000.

• Q: Opening balance of plant is Rs 5,00,000 and closing balance is Rs 6,20,000. Plant costing Rs 80,000 with accumulated depreciation Rs 30,000 was sold for Rs 55,000. Depreciation charged during the year is Rs 70,000. Find cash paid for purchase of plant.
  A: Step 1: Use the plant account at cost because purchase is found from cost figures, not written down value.
  Step 2: Opening plant at cost + purchases - cost of plant sold = closing plant at cost.
  Step 3: Substitute values: 5,00,000 + purchases - 80,000 = 6,20,000.
  Step 4: Purchases = 6,20,000 - 5,00,000 + 80,000 = Rs 2,00,000. Depreciation and accumulated depreciation do not affect purchase at cost.
  Final answer: Cash paid for purchase of plant = Rs 2,00,000, assuming all purchases were for cash.

• Q: A company issued shares for cash Rs 1,50,000, took a long-term loan Rs 2,00,000, repaid loan Rs 75,000, paid interest Rs 18,000 and paid dividend Rs 30,000. Calculate net cash flow from financing activities.
  A: Step 1: Identify financing inflows: issue of shares Rs 1,50,000 and long-term loan raised Rs 2,00,000.
  Step 2: Identify financing outflows: loan repaid Rs 75,000, interest paid Rs 18,000 and dividend paid Rs 30,000.
  Step 3: Net financing cash flow = 1,50,000 + 2,00,000 - 75,000 - 18,000 - 30,000.
  Final answer: Net cash from financing activities = Rs 2,27,000 inflow.

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