NCERT Solutions Class 12 Accountancy Chapter 6 Cash Flow Statement

Test Your Understanding I

Do It Yourself I

 

Question 1. The profit and loss account of Roy Limited is given here under

Additional Information:

Answer:
Indirect Method
Statement for Cash from Operations

Working Note: Provision for Taxation Account

In simple words: The operating cash flow is derived by taking the net profit before tax, adding back non-cash expenses like depreciation, and adjusting for changes in assets and liabilities before subtracting actual tax paid.
Exam Tip: Be sure to create a Provision for Taxation account to find the tax paid during the year, which is then subtracted at the final step.

 

Question 2. From the following information calculate net cash from operations

Answer:
Cash Flow from Operating Activities

Working Note: Calculation of Net Profit before Tax and Extraordinary Items

In simple words: Extraordinary receipts such as famine insurance claims must be subtracted from net profits at the start and added back only at the final cash flow stage.
Exam Tip: Be careful with the treatment of famine insurance proceeds - they are removed from profit initially and added as an inflow at the end.

 

Test Your Understanding II

 

Question 1. Choose one of the two alternatives given below and fill in the blanks in the following statements
(a) If the net profits earned during the year is Rs. 50,000 and the amount of debtors in the beginning and the end of the year is Rs. 10,000 and Rs. 20,000 respectively, then the cash from operating activities will be equal to Rs.................(Rs. 40,000/ Rs. 60,000).
(b) If the net profits made during the year are Rs. 50,000 and the bills receivables have decreased by Rs. 10,000 during the year then the cash flow from operating activities will be equal to Rs.................(Rs. 40,000/Rs. 60,000).
(c) Expenses paid in advance at the end of the year are.........................the profit made during the year (added to/deducted from).
(d) An increase in accrued income during the particular year is.........................for calculating the cash flow from operating activities (added to/deducted from).
(f) For calculating cash flow from operating activities, provision for doubtful debts is............................the profit made during the year (added to/deducted from).
Answer:
(a) Rs. 40,000
(b) Rs. 60,000
(c) Deducted from
(d) Added to
(f) Added to
In simple words: When calculating cash flows, an increase in asset values means cash was used, so it is deducted. A decrease in assets or an increase in provisions means cash is freed up or added back.

Exam Tip: Remember that prepayments are assets, so an increase in prepaid expenses is deducted, and a decrease is added.

 

Question 2. While computing cash from operating activities, indicate whether the following items will be added or subtracted from the net profit, if not to be considered write NC.
(a) Increase in the value of creditors
(b) Increase in the value of patents
(c) Decrease in prepaid expenses
(d) Decrease in income received in advance
(e) Decrease in value of stock
(f) Increase in share capital
(g) Increase in the value of bills receivables
(h) Increase in the amount of outstanding expenses
(i) Conversion of debentures into shares
(j) Decrease in the value of bills payables
(k) Increase in the value of debtors
(l) Decrease in the amount of accrued income
Answer:
(a) Added
(b) NC
(c) Added
(d) Subtracted
(e) Added
(f) NC
(g) Subtracted
(h) Added
(i) NC
(j) Subtracted
(k) Subtracted
(l) Added
In simple words: Operating activities only include items from the current assets and liabilities directly tied to trading. Investing or financing transactions, along with non-cash settlements, have no place here.

Exam Tip: Always label purely financing or investing items like share capital and patent increases as "NC" (not considered) in the operating activities section.

 

Do It Yourself II

 

Question 1. From the following particulars, calculate cash flows from investing activities

Interest received on debentures held as investment Rs. 60,000 Dividend received on shares held as investment Rs. 10,000
A plot of land had been purchased for investment purposes and was let out for commercial use and rent received Rs. 30,000.
Answer:
Cash Flow from Investing Activities

In simple words: Buying assets uses up cash, making it negative, while selling assets or earning dividends, interest, and rent brings in cash, making it positive.
Exam Tip: Be sure to include rent received on investments as an investing cash inflow, even if it looks like a rental activity.

 

Question 2. From the following Information, calculate cash flow from investing and financing activities

In year 2011, machine costing Rs. 2,00,000 was sold at a profit of Rs. 1,50,000, depreciation charged on machine during the year 2011 amounted to Rs. 2,50,000.
Answer:
Cash Flow from Investing Activities

Cash Flow from Financing Activities

Working Note: Machinery Account

Accumulated Depreciation Account

In simple words: When calculating cash flows, prepare asset and provision accounts to determine hidden purchase values and accumulated depreciation transferred.
Exam Tip: Preparing ledger accounts for fixed assets and accumulated depreciation helps in accurately finding the missing purchase and sale values.

 

Short Answer Type Questions

 

Question 1. What is a cash flow statement?
Answer: A cash flow statement is a financial report that tracks the movement of cash and cash equivalents into and out of a business over a set timeframe. Its main goal is to offer detailed insights into a firm's cash inflows and outflows, categorized into operating, investing, and financing sections. By doing so, it clarifies why the cash balance changed and explains where cash was received and spent during the fiscal year.
In simple words: A cash flow statement is a summary showing where a company's cash came from and where it was spent over a year.

Exam Tip: Use the standard three-fold classification of operating, investing, and financing activities in your definition.

 

Question 2. How the various activities are classified (as per AS-3 revised) while preparing cash flow statement?
Answer: Under the revised Accounting Standard-3, the cash flows of an enterprise are grouped into three main categories:
(i) Cash Flow from Operating Activities: These comprise the primary income-generating operations of the business alongside other non-investing or non-financing transactions. This segment kicks off the cash flow statement, showing how much money is brought in or paid out by core business functions. For example, it includes payments to vendors, receipts from buyers, and settlement of operational expenses and taxes.
(ii) Investing Activities: This category covers the purchase and sale of long-term resources and other investments that do not count as cash equivalents. It reflects transactions involving non-current physical assets like land, buildings, and machinery, as well as intangible assets. Acquiring these items represents a cash outflow, while selling them generates cash inflow.
(iii) Financing Activities: These transactions alter the scale and structure of the company’s equity capital and borrowing. It records cash movements between the firm and its capital providers. For instance, receiving cash from issuing shares or obtaining loans represents an inflow, whereas paying dividends, buying back shares, or repaying debt represents an outflow.
In simple words: Cash activities are split into operating (daily business), investing (buying/selling property and assets), and financing (raising capital and loans).

Exam Tip: Memorize the three divisions under AS-3 as they are the foundation of every cash flow statement.

 

Question 3. State the uses of cash flow statement
Answer: The main applications and benefits of a cash flow statement are:
(i) Combined with other reports, it allows stakeholders to analyze changes in a company's net assets, financial structure, liquidity, and solvency. It also shows how well the business can manage the timing and volume of cash movements to adapt to shifting business conditions.
(ii) It assists users in evaluating how effectively a business can generate cash and cash equivalents, making it easier to build valuation models to compare the present value of future cash flows across different firms.
(iii) This statement improves the comparability of operating results between different companies, as it minimizes the distorting effects of using varying accounting treatments for similar transactions.
(iv) Past cash flow data serves as a useful guide for predicting the volume, timing, and certainty of future cash flows. It also helps verify the reliability of previous cash flow forecasts and sheds light on the link between profitability, cash flow, and changing price levels.
In simple words: A cash flow statement helps owners, banks, and investors see if a company has enough cash to pay its bills and how it generates its money.

Exam Tip: Focus on points like assessing liquidity, planning cash budgets, and comparing performance when explaining uses.

 

Question 4. What are the objectives of preparing cash flow statement?
Answer: The key purposes of preparing a cash flow statement include:
(i) Its primary goal is to determine the total inflows and outflows of cash and cash equivalents across operating, investing, and financing segments.
(ii) It helps pinpoint the specific reasons behind changes in the organization's cash balance over a given financial period.
(iii) It is designed to assess the overall liquidity and short-term solvency of the enterprise.
(iv) It provides essential information to estimate and plan for the future cash requirements of the business.
In simple words: The main goal is to find out how much cash came in, how much went out, and why the cash balance changed.

Exam Tip: State clearly that the primary objective is to determine the net change in cash from operating, investing, and financing activities.

 

Question 5. Explain the terms: Cash equivalents, Cash flows.
Answer: A cash flow statement details the incoming and outgoing cash and cash equivalents of an organization over a specific duration. The key terms are explained below:
Cash Flows: This refers to the movement of cash into the business (inflows) and out of the business (outflows) across different activities.
Cash Equivalents: According to Accounting Standard-3, these are highly liquid, short-term investments that can be quickly converted into specific, known cash amounts. They carry very little risk of value fluctuation. Their primary purpose is to cover short-term financial commitments rather than to earn long-term investment returns. Typically, an investment must mature within three months or less from its purchase date to count as a cash equivalent. Standard shares are usually excluded unless they are preference shares purchased near their redemption date with minimal risk of default. Short-term marketable securities are a prime example of cash equivalents.
In simple words: Cash flows are movements of money, and cash equivalents are short-term, highly safe investments that can be turned into cash in three months or less.

Exam Tip: Use the three-month rule as a critical defining feature of cash equivalents to secure full marks.

 

Question 6. Prepare a format of cash flow from operating activities under direct method and indirect method.
Answer:
Direct Method

Indirect Method

In simple words: The direct method lists actual cash receipts and payments, while the indirect method starts with net profit and adjusts for non-cash and working capital changes.
Exam Tip: Practice both formats as exams frequently ask for the reconciliation of net profit to operating cash flow.

 

Question 7. Now that you know the meaning of operating activities, state clearly what would constitute the operating activities for the following types of enterprises
(i) Hotel (ii) Film production house
(iii) Financial enterprise (iv) Media enterprise
(v) Steel manufacturing unit (vi) Software business unit
Answer: Operating activities comprise the primary revenue-producing operations of a business. They represent transactions related to the core functions of the firm. Here is how they apply to each enterprise:
(i) Hotel: Inflows include cash received from guests for lodging, dining, and other amenities. Outflows include payments for staff wages, utilities like electricity, food ingredients, and general housekeeping supplies.
(ii) Film Production House: Revenue inflows arise from selling film distribution rights and ticket sales. Expenditure outflows include payments to actors, directors, production crew, equipment rentals, and travel costs.
(iii) Financial Enterprise: For financial institutions like banks, major inflows are interest earned on loans and investments, plus repayments of loan principals. Key outflows include interest paid to depositors, loan disbursements, employee salaries, and loan recovery costs.
(iv) Media Enterprise: Revenue is primarily generated from advertisement slots and subscriptions. Expenditure is driven by salaries paid to journalists, photographers, and editors, along with production and broadcasting expenses.
(v) Steel Manufacturing Unit: Cash inflows come from selling steel products like sheets, rods, and castings. Cash outflows go toward buying raw materials like iron ore and coal, and paying factory labor and overheads.
(vi) Software Business Unit: Revenue flows in from software licensing, product sales, and service contracts. Outflows are mostly salaries of developers and support staff, server hosting, and administrative costs.
In simple words: The everyday business that makes money for a hotel is rooms and food, while for a bank it is lending money and collecting interest.

Exam Tip: Tailor your answer to show that what is an investing activity for a manufacturing firm might be an operating activity for a financial firm.

 

Question 8. “The nature/type of enterprise can change altogether the category into which a particular activity may be classified.” Do you agree? Illustrate your answer.
Answer: Yes, the classification of a transaction is directly influenced by the specific industry of the firm. For instance, consider a real estate developer versus a typical manufacturing company. For the real estate developer, buying and selling properties forms their main trade, making these operating activities. In contrast, when a manufacturing firm buys or sells a building, it is acquiring or disposing of a long-term asset, which classifies it as an investing activity. Thus, a single type of transaction can fall into different categories based on what the company does.
In simple words: The same transaction, like buying a building, is an investment for a shop but a regular business operation for a real estate dealer.

Exam Tip: Use the real estate versus general manufacturing firm comparison as it is highly effective and easy for examiners to grade.

 

Long Answer Type Questions

 

Question 1. Describe the procedure to prepare cash flow statement.
Answer: The process of drafting a cash flow statement involves these stages:

Step 1 First, determine the net cash generated or used by operating activities.
Step 2 Next, calculate the net cash movement from investing activities.
Step 3 Subsequently, find the cash movements related to financing activities.
Step 4 Aggregate these three components to get the overall increase or decrease in cash.
Step 5 Add the starting cash and cash equivalents balance to the net change calculated in Step 4. This sum will give the final cash and cash equivalents balance at the end of the year.

We can prepare this statement using either the Direct Method or the Indirect Method. The primary distinction between these two options lies in how they calculate the net cash generated by operations. For the remaining two sections, the calculations do not change. The formats of the cash flow statement for both methods are shown below:
 

Direct Method - Cash Flow Statement

Indirect Method - Cash Flow Statement

In simple words: A cash flow statement is built in three stages: operating, investing, and financing. Adding the starting cash to the net change of these three stages gives the final cash balance.
Exam Tip: Remember to clearly separate the three main activities and verify that the final computed balance matches the actual closing cash balance from the balance sheet.

 

Question 2. Describe "Direct" and "Indirect" method of ascertaining cash flow from operating activities.
Answer: Operating activities represent the initial section of the cash flow statement, which can be drafted using either the direct approach or the indirect approach.

(i) Direct Method: Under this layout, every line item in the operating section corresponds to the total cash receipts or payments within a specific category. For instance, it details actual cash collected from clients, payments made to vendors, interest outlays, employee salaries, expenditures on R-and-D, marketing and administrative fees, along with any other operating cash transactions. The cash flows from operations are calculated as follows:

(a) Cash Receipts from Customers:
\( \text{Cash Receipts from Customers} = \text{Net Sales} + \text{Beginning Accounts Receivable} - \text{Ending Accounts Receivable} \)

(b) Cash Payments to Suppliers:
\( \text{Cash Payments to Suppliers} = \text{Purchase} + \text{Ending Inventory} - \text{Beginning Inventory} + \text{Beginning Accounts Payable} - \text{Ending Accounts Payable} \)

(c) Cash Payments to Employees:
\( \text{Cash Payments to Employees} = \text{Beginning Salaries Payable} - \text{Ending Salaries Payable} + \text{Salaries Expense} \)

(d) Cash Payments for Purchase of Prepaid Assets:
\( \text{Cash Payments for Purchase of Prepaid Assets} = \text{Ending Prepaid Rent/Insurance} + \text{Expired Rent/Insurance} - \text{Beginning Prepaid Rent/Insurance} \)

(e) Interest Payments:
\( \text{Interest Payments} = \text{Beginning Interest Payable} - \text{Ending Interest Payable} + \text{Interest Expense} \)

(f) Income Tax Payments:
\( \text{Income Tax Payments} = \text{Beginning Income Tax Payable} - \text{Ending Income Tax Payable} + \text{Income Tax Expense} \)

(g) Other Receipts and Payments: Other operating inflows and outflows not detailed above.

(ii) Indirect Method: This technique starts with the net income from the profit and loss statement to find the net cash flow from operations. Because financial statements use the accrual concept - where revenues and costs are recorded when incurred rather than when cash changes hands - net profit does not mirror actual cash flow. Thus, we adjust net earnings (or operating profit) by reversing non-cash expenses, non-operating items, and changes in working capital assets and liabilities.
In simple words: The direct method lists actual cash received and paid, like a bank passbook. The indirect method starts with net profit and adjusts it by adding back non-cash expenses (like depreciation) and correcting for changes in inventory, debtors, and creditors.

Exam Tip: Be clear on how current assets and current liabilities affect cash flow under the indirect method: add decreases in current assets and increases in current liabilities, and deduct the opposite.

 

Question 3. Explain the major cash inflows and outflows from investing activities.
Answer: The subsequent phase in constructing the cash flow statement is examining expenditures on long-term assets. When an enterprise capitalizes an acquisition, the immediate cash outflow is excluded from the income statement. This is because accounting guidelines require the firm to systematically spread out and expense the asset cost through depreciation over its useful lifespan. In practice, purchasing items like machinery or factory equipment usually involves a cash payment. This reduction in funds must be shown as an investing cash outflow.

Illustration: Suppose Company X acquired a computer system valued at Rs. 15,00,000 and factory assembly line machinery worth Rs. 20,00,000. These represent the firm's only capital assets acquired during the period. Furthermore, the company invested Rs. 5,00,000 in a special decommissioning fund to purchase new machinery. Typically, companies combine these outlays into a single line labeled as plant additions, but we present them here individually:
 

The summary table shows that the organization made a total investment of Rs. 40,00,000 in non-current assets during this period.
In simple words: Investing activities show the cash spent or received from buying and selling long-term assets like land, buildings, machinery, or investments. Outflows are purchases, and inflows are sales or returns like interest and dividends.
Exam Tip: Remember that purchase of fixed assets is always negative (cash outflow), while sale of fixed assets, interest received, and dividends received are positive (cash inflow).

 

Question 4. Explain the major Cash inflows and outflows from financing activities.
Answer: The last section to analyze in the cash flow statement is the funding acquired or repaid through financing activities. Similar to the operating cash section, financing transactions can result in either positive inflows or negative outflows of cash depending on the specific actions taken during the financial year. Common adjustments in this segment cover fluctuations in short-term and long-term borrowing (such as issuing bonds or repaying loans), issuing preference or equity shares, buybacks or retirement of shares, and cash dividend payments.

Illustration: Let us say Company X raised Rs. 2,50,000 through the issuance of common stock. They additionally issued preference shares of Rs. 5,00,000, paid back long-term borrowings worth Rs. 3,00,000, and paid a cash dividend of Rs. 2,00,000. This shows that Company X generated more capital through financing than it repaid during the year.
 

In simple words: Financing activities show how a company raises and pays back its capital. Inflows come from issuing shares or taking loans, while outflows happen when the company pays dividends or pays back its debts.
Exam Tip: Be careful with dividend and interest payments - under standard guidelines, these are classified under financing activities, whereas receiving interest or dividends is classified under investing activities.

 

Numerical Questions

 

Question 1. Anand Ltd arrived at a net income of Rs. 5,00,000 for the year ended March 31, 2007. Depreciation for the year was Rs. 2,00,000. There was a gain of Rs. 50,000 on assets sold which was credited to profit and loss account. Bills receivable increased during the year by Rs. 40,000 and bills payable also increased by Rs. 60,000. Compute the cash flow from operating activities by the indirect approach.
Answer:
 

Cash Flow from Operating Activities of Anand Ltd. for the year ended March 31, 2007

In simple words: To calculate the operating cash flow, we start with the net profit. We add back non-cash expenses like depreciation, and deduct non-operating gains like profit on asset sales. Then, we adjust for working capital changes: adding the increase in bills payable (liabilities) and subtracting the increase in bills receivable (assets).
Exam Tip: Be sure to subtract non-operating gains (such as gain on sale of assets) from net profit because they are already included in net income but do not belong to operating activities.

 

Question 2. From the information given below, you are required to prepare the cash paid for the inventory

Answer:

Creditor's Account

The total cash paid for inventory amounts to Rs. 1,59,500.

Note: All purchases are assumed to be credit purchases. The opening and closing inventory levels do not affect the cash paid to creditors.
In simple words: To find out the actual cash paid to suppliers for inventory, we prepare the Creditors' Account. We add the opening balance of creditors to the credit purchases, and then subtract the closing balance of creditors.
Exam Tip: Be careful not to confuse inventory balances with creditors' balances when calculating the cash paid to creditors - only creditors' balances and purchases affect this calculation.

 

Question 3. For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow viz, operating, investing and financing.
(a) Acquired machinery for Rs. 2,50,000 paying 20% drawn and executing a bond for the balance payable.
(b) Paid Rs. 2,50,000 to acquire shares in Informa Tech and received a dividend of Rs.50,000 after acquisition.
(c) Sold machinery of original cost Rs. 2,00,000 with an accumulated depreciation of Rs. 1,60,000 for Rs. 60,000.
Answer:

(a) This transaction belongs to investing activities. The actual cash paid is a partial down payment of Rs. 50,000.
Working Note:
\( \text{Cash outflow} = \text{Rs. 2,50,000} \times \frac{20}{100} = \text{Rs. 50,000} \)
The remaining balance settled via bonds does not involve any cash movement, so it is omitted from the statement.

(b) This transaction represents an investing activity. Purchasing shares in Informa Tech is classified as an investment, while receiving dividends is also categorized under investing. The net effect is:
\( \text{Net cash outflow} = \text{Rs. 2,50,000} - \text{Rs. 50,000} = \text{Rs. 2,00,000} \)

(c) This transaction falls under investing activities. The sale of machinery generates an inflow of Rs. 60,000. Additionally, the profit on sale of Rs. 20,000 (computed as Rs. 60,000 sales value minus Rs. 40,000 book value, where book value is Rs. 2,00,000 minus Rs. 1,60,000) must be subtracted from net profits in the operating activities section to avoid double counting.
In simple words: Only transactions that actually involve cash are shown in a cash flow statement. Non-cash transactions, like issuing bonds for machinery, are excluded.

Exam Tip: Be sure to exclude non-cash transactions (like executing bonds for purchase) from the cash flow statement, and write a clear working note explaining this treatment to secure full marks.

 

Question 4. The following is the profit and loss account of Yamuna Limited

Yamuna Limited Profit and Loss Account for the year ended March 31, 2007

Additional Information:
(i) Trade debtors decrease by Rs. 30,000 during the year.
(ii) Prepaid expenses increase by Rs. 5,000 during the year.
(iii) Trade creditors decrease by Rs. 15,000 during the year.
(iv) Outstanding expenses increased by Rs. 3,000 during the year.
(v) Operating expenses included depreciation of Rs. 25,000.

Compute net cash provided by operations for the year ended March 31, 2007 by the indirect method.

Answer:

Cash Flow from Operating Activities of Yamuna Limited as on March 31, 2007

In simple words: To calculate cash from operations under the indirect method, we first add depreciation back to net profit since it is a non-cash expense. Then we adjust for current assets and liabilities: a decrease in stock and debtors is added, while a decrease in creditors and an increase in prepaid expenses are subtracted.
Exam Tip: Remember that "Stock (Decrease)" must be calculated as Opening Stock (Rs. 2,50,000) minus Closing Stock (Rs. 2,00,000) and treated as a source of cash.

 

Question 5. Compute cash from operations from
(i) Profit for the year 2010-11 is a sum of Rs. 10,000 after providing for depreciation of Rs. 2,000.
(ii) The current assets of the business for the year ended March 31, 2010 and 2011 are as follows:

Answer:

Cash Flow from Operating Activities as on March 31, 2011

In simple words: Under the indirect method, we analyze changes in the balance sheet items. Increases in current assets like debtors and inventory decrease our cash, while increases in liabilities like creditors and bills payable increase our cash.
Exam Tip: Be sure to treat Provision for Doubtful Debts as a current liability. A change in provision (increase) should be added back to operating profits.

 

Question 6. From the following Particulars of Bharat Gas Limited, calculate cash flows from investing activities. Also show the workings clearly preparing the ledger accounts.

Balance Sheet of Bharat Gas Limited as on ........

Additional Information:
(a) Patents were written-off to the extent of Rs. 40,000 and some patents were sold at a profit of Rs.20,000.
(b) A machine costing Rs. 1,40,000 (depreciation provided thereon Rs. 60,000) was sold for Rs. 50,000. Depreciation charged during the year was Rs. 1,40,000.
(c) On March 31, 2007, 10% investments were purchased for Rs. 1,80,000 and some investments were sold at a profit of Rs.20,000. Interest on investment was received on March 31, 2011.
(d) Amartax Ltd paid dividend @ 10% on its shares.
(e) A plot of land had been purchased for investment purposes and let out for commercial use and rent received Rs.30,000.

Answer:

Cash Flow from Investing Activities of Bharat Gas Limited

Ledger Accounts:

Patents Account

Machinery Account

10% Long Term Investment Account

Working Note: The book value of the machine sold is calculated as cost price (Rs. 1,40,000) minus its accumulated depreciation (Rs. 60,000), which equals Rs. 80,000. Since it was sold for Rs. 50,000, the resulting loss on sale is Rs. 30,000.

Note: Any returns earned from investments, such as dividend payments, interest earnings, or rental income, are classified as inflows under investing activities.
In simple words: When calculating cash flows from investing activities, we must prepare individual ledger accounts for assets to determine the hidden figures of purchase or sale of assets. Cash received from sales and returns is added, and cash paid for purchases is deducted.
Exam Tip: Preparing ledger accounts for Patents, Machinery, and Investments is the most reliable way to find the balancing figures for purchases and sales - missing this step often leads to errors.

 

Question 7. From the following Balance Sheet of Mohan Ltd, prepare cash flow statement.

Balance Sheet of Rajeshwar Limited
as on........

Additional Information
Machine costing Rs. 80,000 on which accumulated depreciation was Rs. 50,000 was sold for Rs. 20,000.

Answer:

Cash Flow Statement of Mohan Ltd

Working Notes:

In simple words: This statement tracks how the company's cash balance decreased by Rs. 60,000. It shows that although operations generated positive cash flow of Rs. 1,80,000, investing heavily in new fixed assets (Rs. 2,80,000) resulted in an overall cash outflow.

Exam Tip: Be sure to draft the Fixed Assets Account and Accumulated Depreciation Account concurrently. The balancing figure in the Accumulated Depreciation Account gives the current year's depreciation to be added back to Operating Profit.

 

Question 8. From the following Balance Sheet of Tiger Super Steel Ltd, prepare Cash flow statement.

Balance Sheet

Additional Information
Depreciation Charged on Land and building Rs. 20,000 and plant Rs. 10,000 during the year.

Answer:

Cash Flow Statement of Tiger Super Steels Ltd

Working Notes:

In simple words: This statement outlines how the cash balance grew by Rs. 4,400. Even though the company bought new plant assets and paid off preference shares, their robust operating cash generation (Rs. 56,000) and new equity issue kept the company's net flow positive.

Exam Tip: Keep in mind that goodwill written-off (Rs. 5,200) is a non-cash expense and must be added back under Operating Activities. Additionally, the previous year's tax provision is treated as the tax paid during the current year.

 

Question 9. Prepare cash flow statement from the following information

Balance Sheet

Additional Information
Depreciation charged on plant amount to Rs. 80,000.

Answer:

Cash Flow Statement

Working Notes:

In simple words: Cash increased by Rs. 1,00,000 because operations brought in Rs. 3,80,000. This operating cash flow was enough to buy Rs. 2,80,000 in plant assets, while the new shares issued covered the cost of retiring old debentures.

Exam Tip: Note that the discount on debentures written-off is an amortized non-cash item. Always add this back to operating profits, similar to how you treat goodwill amortization.

 

Question 10. From the following information, prepare cash flow statement for Yogeta Ltd.

Balance Sheet

Additional Information
Net profit for the year after charging Rs. 50,000 as depreciation was Rs. 1,50,000, dividend paid on share was Rs. 50,000, tax provision created during the year amounted to Rs. 60,000.

Answer:

Cash Flow Statement of Yogeta Ltd

Working Notes:

In simple words: The net cash position went down by Rs. 1,50,000, turning the positive cash balance of Rs. 50,000 at the start of the year into a bank overdraft of Rs. 1,00,000. This is because the purchase of new fixed assets (Rs. 3,50,000) was much larger than the cash generated from operations and financing sources.

Exam Tip: If both the provision created (credited to Provision for Tax Account) and opening/closing balances of tax are given, prepare a T-account. The balancing debit figure represents the actual cash tax paid during the year.

 

Question 11. Following is the Financial Statement of Garima Ltd. Prepare cash flow statement.

Balance Sheet
as on 31st December, 2011

Profit and Loss Account
for the year ended December 31, 2011

Answer:

Cash Flow Statement of Garima Ltd
as on December 31, 2011 (Direct Method)

Alternative Method
Cash Flow Statement (Indirect Method)

Working Notes:

Calculations:
(i) Cash receipts from the customers:
Sales + Opening Debtors - Closing Debtors = 5,00,000 + 20,000 - 80,000 = Rs. 4,40,000
(ii) Cash paid to the creditors:
Purchase + Opening Creditors - Closing Creditors = 4,92,000 + 56,000 - 1,56,000 = Rs. 3,92,000
(iii) Cash paid for expenses:
Salaries + Prepaid Expenses at the end - Prepaid Expenses in the beginning = 44,000 + 16,000 - 8,000 = Rs. 52,000
Note: To determine cash received or paid, debtors and creditors accounts can also be drafted.

In simple words: This example illustrates both the direct and indirect methods of calculating cash flows. Both options yield the exact same net cash reduction of Rs. 52,000, confirming that the two reporting methods are equivalent in their final balance.

Exam Tip: Under the Direct Method, always clearly layout working notes for cash collections from customers and payments to suppliers, as these carry step-marks in exams.

 

Question 12. Following is the Balance Sheet of Computer India Ltd

Balance Sheet

Additional Information
Interest paid on debenture Rs. 600.

Answer:

Cash Flow Statement

In simple words: Cash and cash equivalents grew by Rs. 8,000, bringing down the net overdraft deficit from negative Rs. 11,300 to negative Rs. 3,300. This was accomplished by combining Rs. 2,100 from operations and Rs. 4,900 from issuing new shares and debentures.

Exam Tip: Be sure to treat bank overdraft as part of Cash and Cash Equivalents when preparing cash flow statements. Combine Cash in hand and Bank Overdraft in the opening and closing balances to ensure a clean final match.