Cash Flow Statement

This page contains the CBSE accountancy class 12 chapter Cash Flow Statement. You can find the questions/answers/solutions for the chapter 11 of CBSE class 12 accountancy in this page. So is the case if you are looking for CBSE class 12 Commerce related topic Cash Flow Statement. This page contains theretical questions, Test Your Understanding, Do It Yourself, Short Answers and Long Answers. If you’re looking for Numerical Questions Solutions, you can find them at Numerical Questions Solutions

Test your Understanding – I
Classify the following activities into operating activities, investing activities, financing activities, cash equivalents.
1.
Purchase of machinery.
2.
Proceeds from issue of equity share capital.
3.
Cash revenue from operations.
4.
Proceeds from long-term borrowings.
5.
Proceeds from sale of old machinery.
6.
Cash receipt from trade receivables.
7.
Trading commission received.
8.
Purchase of non-current investment.
9.
Redemption of preference shares.
10.
Cash purchases.
11.
Proceeds from sale of non-current investment.
12.
Purchase of goodwill.
13.
Cash paid to supplier.
14.
Interim dividend paid on equity shares.
15.
Employee benefits expenses paid.
16.
Proceeds from sale of patents.
17.
Interest received on debentures held as investments.
18.
Interest paid on long-term borrowings.
19.
Office and administrative expenses paid.
20.
Manufacturing overheads paid.
21.
Dividend received on shares held as investment.
22.
Rent received on property held as investment.
23.
Selling and distribution expenses paid.
24.
Income tax paid.
25.
Dividend paid on preferences shares.
26.
Under-writing commission paid.
27.
Rent paid.
28.
Brokerage paid on purchase of
29.
Bank overdraft.
non-current investment.
30.
Cash credit.
31.
Short-term deposit.
32.
Marketable securities.
33.
Refund of income-tax received.
The following is the classification of the given activities into operating activities, investing activities, financing activities and cash equivalents.
Operating Activity
Investing Activity
Financing Activity
Cash Equivalents
3. Cash revenue from operations.
1. Purchase of machinery.
2. Proceeds from issue of equity share capital.
30. Cash credit
6. Cash receipt from trade receivables.
5. Proceeds from sale of old machinery.
4. Proceeds from long-term borrowings.
31. Short-term deposit
7. Trading commission received.
8. Purchase of non-current investment
9. Redemption of preference shares.
32. Marketable securities.
10. Cash purchases.
11. Proceeds from sale of non-current investment
14. Interim dividend paid on equity shares.
33. Refund of income-tax received.
13. Cash paid to supplier.
12. Purchase of goodwill
18. Interest paid on long-term borrowings.
15. Employee benefits expenses paid.
16. Proceeds from sale of patents.
25. Dividend paid on preference shares.
19. Office and adminstrative expenses paid.
17. Interest received on debentures held as investments.
26. Under-writing commission paid.
20. Manufacturing overheads paid.
21. Dividend received on shares held as investment.
28. Brokerage paid on purchases of non-current investment.
23. Selling and distribution expenses paid.
22. Rent received on property held as investment.
29. Bank overdraft.
24. Income tax paid.
27. Rend paid.

Test your Understanding – II
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 ₹ 50,000 and the amount of debtors in the beginning and the end of the year is ₹ 10,000 and ₹ 20,000 respectively, then the cash from operating activities will be equal to (₹ 40,000 ✔/ ₹ 60,000)
(b)
If the net profits made during the year are ₹ 50,000 and the bills receivables have decreased by ₹ 10,000 during the year then the cash flow from operating activities will be equal to (₹ 40,000/ ₹ 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 the net profit (added to ✔/deducted from).
(e)
Goodwill amortised is the profit made during the year 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).
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
Items
Treatment
(a)
Increase in the value of creditors
Added
(b)
Increase in the value of patents
NC
(c)
Decrease in prepaid expenses
Added
(d)
Decrease in income received in advance
Subtracted
(e)
Decrease in value of inventory
Added
(f)
Increase in share capital
NC
(g)
Increase in the value of trade receivables
Subtracted
(h)
Increase in the amount of outstanding expenses
Added
(i)
Conversion of debentures into shares
NC
(j)
Decrease in the value of trade payables
Subtracted
(k)
Increase in the value of trade receivables
Subtracted
(l)
Decrease in the amount of accrued income.
Added

Do it Yourself
1. From the following particulars, calculate cash flows from investing activities:
Purchased
Sold
Plant
4,40,000
50,000
Investments
1,80,000
1,00,000
Goodwill
2,00,000
Patents
1,00,000
Interest received on debentures held as investment ₹ 60,000
Dividend received on shares held as investment ₹ 10,000
A plot of land had been purchased for investment purposes and was let out for commercial use and rent received ₹ 30,000.
Cash flows from Investing Activities
Particulars
Amount
Purchase of Plant
(4,40,000)
Purchase of Investment
(1,80,000)
Purchase of Goodwill
(2,00,000)
Sale of Plant
50,000
Sale of Investment
1,00,000
Sale of Patents
1,00,000
Interest on Debentures invested
60,000
Dividend on shares invested
10,000
Rent received on Land invested
30,000
Net Cash used in Investing Activities
(4,70,000)
2. From the following Information, calculate cash flows from investing and financing activities:
Particulars
2016
2017
Machine at cost
5,00,000
9,00,000
Accumulated Depreciation
3,00,000
4,50,000
Equity Shares Capital
28,00,000
35,00,000
Bank Loan
12,50,000
7,50,000
In year 2017, machine costing ₹ 2,00,000 was sold at a profit of ₹ 1,50,000, Depreciation charged on machine during the year 2015 2016 amounted to ₹ 2,50,000.
Cash Flow from Investing Activities
Particulars
Amount
Purchase of Machinery
(6,00,000)
Sale of Machinery
2,50,000
Net Cash flow from Investing Activities
(3,50,000)
Cash Flow from Financing Activities
Particulars
Amount
Issue of Equity Shares
7,00,000
Payment of Bank Loan
(5,00,000)
Net Cash flow from Financing Activities
2,00,000
Date
Particulars
J.F.
Amount
Date
Particulars
J.F.
Amount
To Balance b/d
5,00,000
By Bank A/c
2,50,000
To Profit and Loss A/c
1,50,000
(₹ 1,00,000 + ₹ 1,50,000)
(Profit on Sale of Machinery)
By Accumulated Depreciation A/c
1,00,000
To Bank A/c
(Purchase of Machinery)
(Balancing Figure)
6,00,000
By Balance c/d
9,00,000
12,50,000
12,50,000
Date
Particulars
J.F.
Amount
Date
Particulars
J.F.
Amount
To Machinery A/c
1,00,000
By Balance b/d
3,00,000
(Depreciation on
By Profit and Loss A/c
2,50,000
Machinery Sold)
(Depreciation provided
To Balance c/d
4,50,000
during the year)
5,50,000
5,50,000

Short Answer Questions
1. What is a Cash flow statement?
The statemnt that shows the inflows and outflows of the cash and cash and equivalents is known as Cash flow Statement. It is prepared to know about the sources and uses of cash and cash equivalents of an enterprise over a period of time from various activities of an enterprise. A cash flow statement provides information about the historical changes in cash and cash equivalents of an enterprise by classifying cash flows into
operating
investing
and financing activities.

2. How are the various activities classified (as per AS-3 revised) while preparing cash flow statement?
As per AS-3, the various activiites are classified into 3 categories while preparing the cash flow statement.
(i) Cash Flow from Operating Activities: The cash flow from the activities that constitute the primary or main activities of an enterprise.These are the principal revenue generating or main activities of the interprise. The amount of cash from operations indicates the internal solvency level of the company. It is considered as the key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capabilities of the enterprise without depending on the external source of financing.
(ii) Cash Flow from Investing Activities: The cash flow from the activities that constitute the acquisition and disposal of long-term assets and other investments that are not included in cash equivalents. They include purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building etc. Transactions related to long-term investment are also investing activities.
(iii) Cash Flow from financing Activities: The cash flow from the activities that constitute long-term funds or capital of an enterprise. For instance, the cash proceeds from
issue of equity shares
debentures
raising long-term loans
repayment of bank loan etc.
The activities result in changes in the size and composition of the owners’ capital and borrowings of a firm.

3. State the objectives of cash flow statement.
The following are the objectives of preparing the cash flow statement.
1.
The primary objectve of cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads namely.
operating activities
investing activities
financing activities
2.
To provide information useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash flows. In otherwords, to provide information related to liquidity and solvency of the firm.
3.
To let the users evaluate the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.

4. What are the objectives of preparing cash flow statement?
The following are the objectives of preparing the cash flow satement.
1.
To enable the uses to evaluate
the changes in the net assets of an enterprise
its financial structure (including its liquidity and solvency)
its ability to affect the amounts and timings of cash flows
in order to adapt to changing circumstances and opportunities.
2.
To assess the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises.
3.
To enhance the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.
4.
To balance its cash inflow and cash outflow, keeping in response to changing condition. It is also helpful in checking the accuracy of past assessments for furure cash flows and in examining the relationship between profitability and net cash flow and impact of changing prices.

5. State the meaning of the terms: (i) Cash Equivalents, (ii) Cash flows.
(i) Meaning of Cash Equivalents: As per AS-3, ‘Cash’ comprises of cash in hand and deposits with banks, and ‘Cash equivalents’ represents the short-term highly liquid investments that are readily convertible into known amount of cash and are having insignificant risk of losing value. Only those investments that have short-term maturity of 3 months or less can be considered as cash equivalents. Even the shares which substantially equivalent in cash or Short-term marketable securities which can be readily converted into cash are considered as cash equivalents and are liquidable without considerable change in value.
(ii) Meaning of Cash Flows: The movement of cash in and out due to some non-cash items is known as ‘Cash Flows’. Receipt of cash from a non-cash item is termed as cash inflow while cash payment for such items is termed as cash outflow.

6. Prepare a format of cash flow from operating activities.
Indirect method to ascertain the cash flow from operating activities begins with the amount of net profit/loss and has the following format.
Cash Flow from Operating activities under Indirect Method.
Particulars
Cash Flow from Operating Activities:
Net Profit before tax and extraordinary items
—–
Adjustment for Non-cash and Non-operating items:
+ Depreciation
—–
+ Goodwill
—–
+ Interest paid
—–
+ Loss on sale of fixed assets
—–
+ Foreign exchange
—–
– Dividend Received
(—–)
– Profit on sale of fixed assets
(—–)
– Interest received
(—–)
Operating Profit before working capital changes
—–
Adjustment for working capital changes:
– Increase in Current Assets
(—–)
– Decrease in Current Liabilities
(—–)
+ Decrease in Current Assets
—–
+ Increase in Current Liabilities
—–
Cash Generated from Operations
—–
– Income tax paid
(—–(
Cash flow before extraordinary items
—–
+/- Extraordinary Items
—–
Net Cash flow from Operating Activities
—–

7. State clearly what would constitute the operating activities for each of the following enterprises:
(i)
Hotel
(ii)
Film production house
(iii)
Financial enterprise
(iv)
Media enterprise
(v)
Steel manufacturing unit
(vi)
Software development business unit.
(i) Operating activities constituting a hotel:
Cash received from the sale of food items to the customers.
Payment to employees and workers, purchase of raw materials to prepare food items (vegetables, provisions and other raw materials to prepare food), utilities payments (electricity, water, fuel etc) and other materials used in the operations.
(ii) Operating activities constituting a Film Production House
Cash received from the sale distribution rights to the distributors, sale of the film to the OTT platforms
Payment to the production unit and other employees/workers, make-up materials purchased, material purchased for film-settings.
(iii) Operating activities constituting a Financial enterprise
Interest incomes, other investment incomes, receipts when the loans taken by customers are paid, receipts for any other services rendered.
Payments to employees/staff, utility expenses, loan recovery expenses, issuing of loans.
(iv) Operating activities constituting a Media enterprise
Cash received from the sale of advertisements, air-time to other productions.
Payment to workers, freelancers, journalists, photographers, special guests, in-house productions etc.
(v) Operating activities constituting a Steel manufacturing unit
Cash received from the sale of steel materials in various forms like blocks, rails, rods etc.
Payment to workers, purchase of raw iron ore and other chemicals, fuel expenses, transportation charges.
(vi) Operating activities constituting a Software development business unit
Cash received from the software licenses for software they produced, sale of software services, maintenance of software, customization of sofware for specific customers.
Salaries to employees, payments to staff, payments to third-party contractors for availing their services in the software-development.

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.
Yes. I agree that the nature/type of enterprise can change altogether the category into which a particular activity may be classified.
For instance, in case of a manufacturing concern the receipt of interest on debentures or long-term investments is classified as financing activity where as in case of a financial enterprise the receipt of interest is considered as operating activity since they related to the main activity of that enterprise. This example illustrates the fact that the nature/type of enterprise can change altogether the category into which a particular activity may be classified.
Long Answer Questions
1. Describe the procedure to prepare Cash Flow Statement.
The procedure comprising the following steps is used to prepare the Cash Flow Statement is as follows:
A.
Ascertain the cash flows from operating activities. Find the total.
B.
Ascertain the cash flows from investing activities. Find the total.
C.
Ascertain the cash flows from financing activities. Find the Total.
D.
Add the totals obtained in the steps A, B and C.
E.
Deduct the cash and cash equivalents from the sum calculated in Step D. The resulting amount is the closing balance of cash and cash equivalent.
Preparation of Cash Flow Statement using the Indirect Method is depicted below.
Cash Flow Statement using the Indirect Method.
Particulars
I. Cash Flow from Operating Activities:
Net Profit before tax and extraordinary items
—–
Adjustment for Non-cash and Non-operating items:
+ Depreciation
—–
+ Goodwill
—–
+ Interest paid
—–
+ Loss on sale of fixed assets
—–
+ Foreign exchange
—–
– Dividend Received
(—–)
– Profit on sale of fixed assets
(—–)
– Interest received
(—–)
Operating Profit before working capital changes
—–
Adjustment for working capital changes:
– Increase in Current Assets
(—–)
– Decrease in Current Liabilities
(—–)
+ Decrease in Current Assets
—–
+ Increase in Current Liabilities
—–
Cash Generated from Operations
—–
– Income tax paid
(—–)
Cash flow before extraordinary items
—–
+/- Extraordinary Items
—–
A. Cash flow from Operating Activities
—–
II. Cash Flow from Investing Activities
+ Sale of Fixed Assets
—–
+ Sale of Long-term Investments
—–
+ Interest Received
—–
+ Dividend Received
—–
+ Rent Received
—–
– Purchase of Fixed Assets
(—–)
– Purchase of Long-term Invetments
(—–)
B. Cash Flow from Investing Activitiese
—–
III. Cash Flow from Financing Activities
+ Issue of Shares
—–
+ Issue of Debentures
—–
+ Long-term Borrowings
—–
– Redemption of Shares
(—–)
– Redemption of Debentures
(—–)
– Repayment of long-term Borrowings
(—–)
– Interest Paid
(—–)
– Dividend Paid
(—–)
C. Net Cash Flow from Financing Activities
—–
D. Net Increase/Decrease in Cash and Cash Equivalents (A + B + C)
+/- Cash and Cash equivalents at the beginning of the year (Cash in Hand, Cash at Bank, Short-term marketable securities, Short-term marketable deposits.
—–
E. Cash and Cash equivalents at the end of the year
—–
2. Describe “Indirect” method of ascertaining Cash Flow from operating activities.
The starting point is net profit/loss before taxation and extra ordinary items as per Statement of Profit and Loss of the enterprise. As the net profit or loss includes some items which do not lead to cash flow, the net profit or loss is then duly adjusted for the effects of
1.
Transactions of non-cash in nature
2.
Any deferrals or accruals of past/future operating cash receipts.
3.
Items of income or expenses associated with investing or financing cash flows.
The following items are few examples of the items that need to be added to the net profit.
a.
Non-Cash Items. For instance depreciation on fixed assets or goodwill written off etc.
b.
Non-operating expenses. For instance, loss on sale of fixed assets, transfers to reserves etc.
c.
Provisions. For instance, proposed dividend, the provisions for doubful debts, discount for debtors etc.
d.
Any decrease in the current assets or any increase in the current liabilities.
The following items are few examples of the items that need to be deducted from the net profit.
a.
Non-Operating incomes. For instance profit from the sale of fixed assets etc.
b.
Non-trading incomes. For instance, interest received on debentures, dividend received on shares etc.
c.
Any increase in the current assets or any decrease in the current liabilities.
Cash Flow from Operating activities under Indirect Method.
Particulars
Cash Flow from Operating Activities:
Net Profit before tax and extraordinary items
—–
Adjustment for Non-cash and Non-operating items:
+ Depreciation
—–
+ Goodwill
—–
+ Interest paid
—–
+ Loss on sale of fixed assets
—–
+ Foreign exchange
—–
– Dividend Received
(—–)
– Profit on sale of fixed assets
(—–)
– Interest received
(—–)
Operating Profit before working capital changes
—–
Adjustment for working capital changes:
– Increase in Current Assets
(—–)
– Decrease in Current Liabilities
(—–)
+ Decrease in Current Assets
—–
+ Increase in Current Liabilities
—–
Cash Generated from Operations
—–
– Income tax paid
(—–)
Cash flow before extraordinary items
—–
+/- Extraordinary Items
—–
Net Cash flow from Operating Activities
—–
3. Explain the major Cash Inflows and outflows from investing activities.
As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments which are not included in cash equivalnets. Investing activities relate to the purcahse and sale of long-term assets or fixed assets such as machinery, furniture, land and building etc. Transactions relating to long term investments are also investing activities.
It is important that we need to disclose the cash flows from investing activities, as they reflect the extent of expenditure made by the business on the resources intended to generate income and cash flows in the future.
Examples of cash flows arising from the investing activities are as follows:
Cash Outflows from investing activities:
a.
Cash payments made to acquire fixed assets including intangible and capitalised research and development.
b.
Cash payments to acquire shares, warrants or debt instruments of other enterprises other than those instruments held for trading purposes.
c.
Cash advances and loans made to third party (other than loans and advances made by a financial enterprise in which case these will fall under operating activities).
Cash inflows from investing activities:
a.
Cash received from disposal of fixed assets as well as intangible assets..
b.
Cash received from repayment of advances or loans made to third parties (except in case of financial enterpsise).
c.
Cash receipts from disposal of shares, warrants or debt instruments of other enterprises except those held for trading purposes.
d.
Interest received in cash from loans and advances.
e.
Dividends received from investments in other enterprises..
Cash Flow under Indirect Method.
Particulars
Net Cash flow from Operating Activities
—–
Cash Flows from Investing Activities
+ Sale of Fixed Assets
—–
+ Sale of Long-term Investments
—–
+ Interest Received
—–
+ Dividend Received
—–
+ Rent Received
—–
– Purchase of Fixed Assets
(—–)
– Purchase of Long-term Invetments
(—–)
Net Cash Flow from Investing Activitiese
—–
4. Explain the major Cash Inflows and outflows from financing activities.
The activities that are related to long-term funds or capital of an enterprise such as cash proceeds from issue of equity shares, debentures, raising long-term bank loans or repayment of bank loans etc., are called as financing activities. As per AS-3, these are the activities that result in changes in the size and composition of the owner’s capital (including preference share capital in case of a company) and borrowings of the enterprise. It is important to disclose the cash flows arising from financing activities as it will be useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise. The following are the examples of financing activities.
Cash Inflows from financing activities:
a.
Cash proceeds from issuing shares (equity and/or preference shares)
b.
Cash proceeds from issuing debentures, loans, bonds and other short/long-term borrowings.
Cash Outflows from financing activities:
a.
Cash repayments of amounts borrowed.
b.
Interest paid on debentures and long-term loans and advances.
c.
Dividends paid on equity and preference share capital.
One important point worth considering is that a transaction may include cash flows that are classified differently. For instance, consider the case of a fixed assets acquired on deferred payment. When the installment is paid it includes both interest and loan components. The interest element is classified under financing activities and the loan element is classified under investing activities. Moreover, the same activitity may be classified differently for different enterprises. For instance, purchase of shares is an operating activitiy for a share brokerage firm whereas it is an investing activity for other firms.
Cash Flow of Financing Activities under Indirect Method.
Particulars
Cash Flow from Financing Activities
+ Issue of Shares
—–
+ Issue of Debentures
—–
+ Long-term Borrowings
—–
– Redemption of Shares
(—–)
– Redemption of Debentures
(—–)
– Repayment of long-term Borrowings
(—–)
– Interest Paid
(—–)
– Dividend Paid
(—–)
Net Cash Flow from Financing Activities
—–