From the following particulars, calculate cash flows from investing activities:
| Particulars | 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 was ₹30,000.
Concept understanding — Cash Flow Calculation
Cash Flow: From Pocket Money to the Cash Flow Statement
Think of your own pocket money. You get ₹500 from your parents. You spend ₹200 on snacks, ₹100 on a movie ticket, and save ₹200. At the end of the month, your cash in hand has increased by ₹200. That's a cash inflow. If you had spent ₹600 instead, your cash would have decreased by ₹100 — a cash outflow.
Now imagine you run a small business. You sell goods worth ₹10,000, but the customer pays you next month. You also pay rent ₹2,000 in cash today. Your profit might be ₹8,000, but your cash actually went down by ₹2,000. Cash flow is the difference between cash coming in and cash going out during a period. It is not the same as profit.
Why Cash Flow Matters
A business can be profitable on paper yet run out of cash. This is called insolvency — the inability to pay bills when they fall due. Cash flow tells you whether the business has enough liquid money to survive day-to-day operations. The Cash Flow Statement (CFS) is a mandatory financial statement under AS-3 (Accounting Standard 3) for listed companies. It shows why cash changed during the year.
The Three Activities of Cash Flow
The NCERT textbook classifies all cash flows into three buckets:
| Activity | What it includes | Example |
|---|---|---|
| Operating Activities | Main revenue-producing activities | Cash from selling goods, cash paid to suppliers, salaries |
| Investing Activities | Purchase/sale of long-term assets | Buying machinery, selling land, loans given |
| Financing Activities | Changes in equity and borrowings | Issue of shares, repayment of bank loan, dividend paid |
The net increase or decrease in cash during the year = Operating cash flow + Investing cash flow + Financing cash flow. This must match the change in cash balance shown in the Balance Sheet.
Accounting Treatment — No Debit/Credit Here
The Cash Flow Statement is not a journal entry. It is a statement — a report that rearranges information already recorded in the books. You do not debit or credit any account while preparing it. Instead, you analyse the Balance Sheet and Statement of Profit & Loss to identify cash movements.
For example, if the Balance Sheet shows:
- Debtors increased from ₹50,000 to ₹70,000 → cash inflow from debtors is less than sales. So you deduct the increase from operating profit.
- Creditors increased from ₹30,000 to ₹40,000 → you delayed paying suppliers → cash outflow is less than purchases. So you add the increase to operating profit.
The Proforma of a Cash Flow Statement (as per NCERT)
Below is the standard format. All figures are illustrative — do not treat them as real data.
Cash Flow Statement for the year ended 31st March 20XX
| Particulars | Amount (₹) |
|---|---|
| A. Cash Flow from Operating Activities | |
| Net Profit before Tax (from P&L) | 1,00,000 |
| Adjustments for non-cash items: | |
| Add: Depreciation | 20,000 |
| Add: Loss on sale of asset | 5,000 |
| Less: Profit on sale of asset | (3,000) |
| Changes in Working Capital: | |
| Increase in Debtors | (10,000) |
| Decrease in Stock | 8,000 |
| Increase in Creditors | 6,000 |
| Net Cash from Operating Activities | 1,26,000 |
| B. Cash Flow from Investing Activities | |
| Purchase of Machinery | (50,000) |
| Sale of Land | 30,000 |
| Net Cash used in Investing Activities | (20,000) |
| C. Cash Flow from Financing Activities | |
| Issue of Share Capital | 40,000 |
| Repayment of Loan | (15,000) |
| Dividend Paid | (10,000) |
| Net Cash from Financing Activities | 15,000 |
| Net Increase in Cash (A+B+C) | 1,21,000 |
| Add: Opening Cash Balance | 10,000 |
| Closing Cash Balance | 1,31,000 |
Key Formulas You Must Know
While preparing the CFS, you will need these:
- Cash from Operations (Direct Method) = Cash received from customers – Cash paid to suppliers – Cash paid for expenses – Cash paid for taxes
- Cash from Operations (Indirect Method) = Net Profit + Non-cash expenses (depreciation, amortisation) + Loss on sale of assets – Profit on sale of assets + Decrease in current assets – Increase in current assets + Increase in current liabilities – Decrease in current liabilities
- Net Cash Flow = Total Inflows – Total Outflows
A common mistake: treating depreciation as a source of cash. It is not. Depreciation is a non-cash expense — we add it back to net profit because it reduced profit but did not reduce cash. Similarly, profit on sale of asset is subtracted because it increased profit but did not come from operations.
The Bottom Line
The Cash Flow Statement answers one question: Where did the cash come from, and where did it go? It is not about profit — it is about liquidity. For a Class 12 exam, focus on:
- Classifying each transaction into Operating, Investing, or Financing.
- Adjusting net profit for non-cash items and working capital changes.
- Presenting the final statement in the correct format.
Master this, and you will understand the financial health of any business — not just its earnings.
For a non-financial enterprise, interest received, dividend received and rent received on assets held as investments are all investing inflows (AS-3). Every gross purchase (outflow) and gross sale/income (inflow) is shown separately.
Cash Flows from Investing Activities
| Particulars | Amount (₹) |
|---|---|
| Sale of Plant | 50,000 |
| Sale of Investments | 1,00,000 |
| Sale of Patents | 1,00,000 |
| Interest received | 60,000 |
| Dividend received | 10,000 |
| Rent received | 30,000 |
| Purchase of Plant | (4,40,000) |
| Purchase of Investments | (1,80,000) |
| Purchase of Goodwill | (2,00,000) |
| Net cash used in Investing Activities | (4,70,000) |
The NCERT textbook prints this "Do It Yourself" problem without an answer key; the solution above is worked and verified independently.
Total inflows ₹3,50,000 − total outflows ₹8,20,000 = net cash used in Investing Activities ₹4,70,000.
Gross inflows (sales of plant, investments and patents plus interest, dividend and rent received) total ₹3,50,000; gross outflows (purchase of plant, investments and goodwill) total ₹8,20,000 — a net cash outflow of ₹4,70,000 from investing activities.
Concept
Investing activities cover the purchase and sale of long-term assets and investments and the income they earn. For a non-financial enterprise, interest and dividends received on investments, and rent on property held as an investment, are all investing inflows. Gross receipts and gross payments must be shown separately — they are never netted off.
Solution — Cash Flows from Investing Activities
| Particulars | Amount (₹) | Amount (₹) |
|---|---|---|
| Cash Inflows: | ||
| Sale of Plant | 50,000 | |
| Sale of Investments | 1,00,000 | |
| Sale of Patents | 1,00,000 | |
| Interest received on debentures held as investment | 60,000 | |
| Dividend received on shares held as investment | 10,000 | |
| Rent received on land held as investment | 30,000 | |
| Total Cash Inflows (A) | 3,50,000 | |
| Cash Outflows: | ||
| Purchase of Plant | (4,40,000) | |
| Purchase of Investments | (1,80,000) | |
| Purchase of Goodwill | (2,00,000) | |
| Total Cash Outflows (B) | (8,20,000) | |
| Net Cash used in Investing Activities (A − B) | (4,70,000) |
The NCERT textbook prints this "Do It Yourself" problem without an answer key; the solution above is worked and verified independently.
Net cash used in Investing Activities = (₹4,70,000).
Showing the 12 most recent of 15 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.Reduction in goodwill in current year as compared to previous year is _____.(a) sale of goodwill(b) purchase of goodwill(c) written off goodwill(d) All of the above
›Reveal solutionSolution
A reduction in goodwill over the previous year means goodwill has been written off, so the answer is (c).
When the goodwill appearing in the balance sheet is lower than in the previous year, the difference represents goodwill written off (an amortisation/adjustment against profit). It is a non-cash expense, so in the cash flow statement it is added back to net profit while calculating cash flow from operating activities.
✓Final answer(c) written off goodwill.
- CBSE 2026Set MARCH1 markQ.What is cash flow?
›Reveal solutionSolution
Cash flow is the inflow and outflow of cash and cash equivalents during a period.
Cash flow describes the movement of cash and cash equivalents into and out of a business:
- Cash inflow: transactions that increase cash (for example cash sales, cash received from debtors, sale of assets).
- Cash outflow: transactions that decrease cash (for example cash purchases, payment to creditors, purchase of assets).
The net difference between total inflows and outflows over a period is the net increase or decrease in cash, which the cash flow statement analyses across operating, investing and financing activities.
✓Final answerCash flow is the inflow and outflow of cash and cash equivalents of a business during a period.
- CBSE 2025Set ANNUAL1 markMCQQ.Cash Flow Statement is prepared from (A) Balance Sheet (B) Profit & Loss A/c (C) Additional information (D) All of these
›Reveal solutionSolution
A cash flow statement is prepared from the balance sheet, the profit and loss account and additional information together, so the answer is (D).
In BSEB Inter / Bihar Class-12 Accountancy, following the NCERT/CBSE method, the cash flow statement is a derived statement — it is not maintained like a ledger but reconstructed from other records:
- Two years' Balance Sheets (A) give the opening and closing position of assets, liabilities and capital, revealing changes.
- The Profit and Loss (Statement of Profit and Loss) (B) provides the net profit and non-cash/non-operating adjustments.
- Additional information (C) (depreciation, dividends paid, assets sold, etc.) supplies details not visible from the two statements alone.
Since all three sources are needed, option (D) is correct.
✓Final answer(D) All of these
- CBSE 2024Set 67/2/11 markMCQQ.Statement I : Issue of Debentures will result in inflow of cash. Statement II : Issue of Debentures to the vendors for purchase of machinery will result in outflow of cash. Choose the correct option from the following : (A) Both statements are correct. (B) Both statements are incorrect. (C) Statement I is correct and Statement II is incorrect. (D) Statement I is incorrect and Statement II is correct.
›Reveal solutionSolution
Statement I is true because issuing debentures for cash is a genuine financing inflow, while Statement II is false because issuing debentures to vendors for machinery is a non-cash item that causes neither inflow nor outflow. The correct option is (C).
A Cash Flow Statement records only transactions that actually move cash. We must test each statement against this rule.
Statement I — Correct. When a company issues debentures and receives cash in return, cash flows into the business. This is a source of finance, so it is shown as an inflow under Financing Activities. The statement is therefore true.
Statement II — Incorrect. When debentures are issued to the vendors (suppliers of machinery) as consideration for the machinery, no cash changes hands — the asset (machinery) is acquired in exchange for a liability (debentures). Because it involves neither payment nor receipt of cash, it is a non-cash transaction and is completely excluded from the Cash Flow Statement. It certainly does not cause an outflow of cash, so the statement is false.
Since Statement I is correct and Statement II is incorrect, the answer is option (C).
✓Final answer(C) Statement I is correct and Statement II is incorrect.
- CBSE 2024Set ANNUAL1 markMCQQ.Following informations is of Pawan Limited :-During the year provision for Taxation is made of ₹12,000. The amount of cash out flow from operating Activities will be:- A) ₹10,000 B) ₹15,000 C) ₹7,000 D) ₹17,000
Items 1.4.2023 31.3.2024 Provision for Taxations ₹10,000 ₹15,000 ›Reveal solutionSolution
Tax paid = 10,000 + 12,000 − 15,000 = ₹7,000 (cash outflow). Correct option: (C).
When a Provision for Taxation account is maintained, the tax actually paid is found by preparing/closing that account:
Provision for Taxation A/c ₹ ₹ To Bank (tax paid — balancing figure) 7,000 By Balance b/d (1.4.2023) 10,000 To Balance c/d (31.3.2024) 15,000 By Statement of P&L (provision made) 12,000 22,000 22,000 The balancing figure ₹7,000 is the tax paid, deducted as a cash outflow while computing cash flow from operating activities.
✓Final answer(C) ₹7,000
- CBSE 2024Set ANNUAL1 markMCQQ.Which one of the following item is non-cash item? A) Cash in hand B) Bank deposit C) Depreciation D) Marketable securities
›Reveal solutionSolution
Depreciation is a non-cash item; it is added back to net profit in the cash flow statement. Correct option: (C).
Depreciation is the systematic write-off of a fixed asset's cost. It reduces reported profit but does not cause any movement of cash, hence it is a non-cash item added back to net profit when calculating cash flow from operating activities. The other options are cash or cash-equivalent items.
Item Nature Cash in hand Cash Bank deposit Cash equivalent Depreciation Non-cash charge Marketable securities Cash equivalent ✓Final answer(C) Depreciation
- CBSE 2024Set ANNUAL1 markQ.State the main purpose of preparing Cash Flow Statement.
›Reveal solutionSolution
The main purpose of a Cash Flow Statement is to show the inflows and outflows of cash during a period, helping users assess the enterprise's liquidity and cash-generating ability.
A Cash Flow Statement is prepared to:
-
Provide information about the sources (inflows) and applications (outflows) of cash and cash equivalents of an enterprise during a particular accounting period.
-
Classify these cash flows into three distinct activities — Operating, Investing, and Financing — so users can see exactly where cash was generated and where it was spent.
-
Help users of financial statements (management, investors, creditors) evaluate the firm's ability to generate cash, meet its obligations, pay dividends, and fund its operating and investing needs without relying excessively on external financing.
-
Act as a check on the "quality" of reported profits — since profit under the accrual basis (Statement of Profit and Loss) may differ significantly from actual cash generated, the Cash Flow Statement reconciles the two.
✓Final answerThe main purpose of preparing a Cash Flow Statement is to report the inflows and outflows of cash and cash equivalents during a period, classified under Operating, Investing and Financing activities, so as to help users assess the enterprise's liquidity, solvency, and ability to generate cash.
-
- CBSE 2023Set ANNUAL1 markMCQQ.If the net profit earned during the year is ₹ 1 lakh and the increase in debtors during the year is ₹ 25,000, what will be the amount of cash from operation?(a) ₹ 25,000(b) ₹ 50,000(c) ₹ 75,000(d) ₹ 1,25,000
›Reveal solutionSolution
Cash from operations = Net profit − increase in debtors = 1,00,000 − 25,000 = ₹ 75,000 — answer (c).
This WBCHSE HS Accountancy MCQ tests adjusting profit for a change in debtors to arrive at cash from operations.
An increase in debtors (trade receivables) means credit sales of that amount were included in profit but not yet collected in cash, so it must be deducted from net profit:
Particulars ₹ Net profit for the year 1,00,000 Less: Increase in Debtors (25,000) Cash from operations 75,000 ✓Final answer(c) ₹ 75,000 — net profit ₹ 1,00,000 less the ₹ 25,000 increase in debtors.
- CBSE 2023Set ANNUAL1 markMCQQ.Sweat equities are issued to (A) Employees (B) Directors (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
Net loss (50,000) adjusted for working-capital changes — Debtors down 5,000 (+), Creditors down 2,000 (−), Bills Receivable up 2,000 (−), Prepaid expenses down 1,000 (+) — gives net cash used in operations of Rs. 48,000.
First work out the change in each current item and its effect on cash. A decrease in a current asset releases cash (+), an increase in a current asset blocks cash (−); an increase in a current liability brings cash (+), a decrease in a current liability uses cash (−).
Item 2020 (Rs.) 2021 (Rs.) Change Effect on cash (Rs.) Debtors 20,000 15,000 Decrease 5,000 +5,000 Creditors 10,000 8,000 Decrease 2,000 −2,000 Bills Receivable 6,000 8,000 Increase 2,000 −2,000 Prepaid expenses 8,000 7,000 Decrease 1,000 +1,000 Net change in working capital +2,000 Cash flow from operating activities (indirect method):
Particulars Amount (Rs.) Net loss during the year (50,000) Add: Decrease in Debtors 5,000 Less: Decrease in Creditors (2,000) Less: Increase in Bills Receivable (2,000) Add: Decrease in Prepaid expenses 1,000 Net cash used in operating activities (48,000) The result is negative, meaning the firm's operations drained cash during the year.
✓Final answerNet cash used in operating activities = Rs. 48,000 (a net outflow).
- CBSE 2023Set ANNUAL1 markMCQQ.Cash flow statement is prepared from (A) Balance sheet (B) Profit and Loss account (C) Additional information (D) All of these
›Reveal solutionSolution
A cash flow statement is prepared using comparative Balance Sheets, the Statement of Profit and Loss and additional information together.
To prepare a cash flow statement, the following are needed:
- Balance Sheets of two years (to find changes in assets, liabilities and capital).
- Profit and Loss Account (to find profit, non-cash charges like depreciation, etc.).
- Additional information (such as sale/purchase of fixed assets, dividend paid).
Since all of these are used together, (D) is correct.
✓Final answer(D) All of these.
- CBSE 2023Set ANNUAL1 markMCQQ.If the net profit earned during the year is ₹ 75,000 and stock in the beginning and at the end of year is ₹15,000 and ₹1,00,000 respectively, then the cash flow from operating activities will be :- A) ₹10,000 B) ₹(10,000) C) ₹1,60,000 D) ₹(1,60,000)
›Reveal solutionSolution
Net profit ₹75,000 − increase in stock ₹85,000 = ₹(10,000) cash used in operations.
Using the indirect method, a change in a current asset adjusts operating cash flow: an increase in a current asset (here, stock) is deducted because cash has been tied up in it.
Particulars ₹ Net profit 75,000 Less: Increase in stock (1,00,000 − 15,000) (85,000) Cash flow from operating activities (10,000) The negative figure means cash of ₹10,000 was used, not generated.
✓Final answer(B) ₹(10,000).
- CBSE 2023Set ANNUAL1 markQ.Bhavesh Ltd. made a net profit ₹75,000 after a transfer to general Reserve of ₹15,000 and gain on sale of machinery is ₹10,000, then calculate the cash flow from operating activities.
›Reveal solutionSolution
75,000 + 15,000 (reserve add-back) − 10,000 (gain on machinery) = ₹80,000.
To reach cash from operations we start from net profit, add back appropriations such as transfer to reserve, and remove gains that belong to investing activities.
Particulars ₹ Net profit (after transfer to general reserve) 75,000 Add: Transfer to General Reserve (appropriation) 15,000 Net profit before appropriations 90,000 Less: Gain on sale of machinery (investing item) (10,000) Cash flow from operating activities 80,000 ✓Final answer₹80,000.
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