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Q.

Read the following hypothetical text and answer the given question on this basis : Azad, inspired by 'Make-in-India' mission, initiated his start-up in the form of a company 'Azad Ltd.' along with six other promoters in 2016. The company has been earning good revenue consistently. The financial position of Azad Ltd. as at 31st March, 2022 was as follows : Balance Sheet of Azad Ltd. as at 31st March, 2022

ParticularsNote No.31.3.2022 ₹31.3.2021 ₹
I – Equity and Liabilities :
1. Shareholders' Funds
(a) Share Capital19,00,00017,00,000
(b) Reserves and Surplus16,00,0003,00,000
2. Non-Current Liabilities
Long-term Borrowings25,00,0004,00,000
3. Current Liabilities
(a) Short-term Borrowings31,70,0001,75,000
(b) Short-term Provisions42,00,0001,65,000
Total33,70,00027,40,000
II – Assets :
1. Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets524,00,00019,00,000
(ii) Intangible Assets64,00,0003,00,000
(b) Non-current Investments1,00,0002,00,000
2. Current Assets
(a) Current Investments1,40,0001,70,000
(b) Inventories2,60,0001,30,000
(c) Cash and Cash Equivalents70,00040,000
Total33,70,00027,40,000

Notes to Accounts :

Note No.Particulars31.3.2022 ₹31.3.2021 ₹
(1)Reserves and Surplus (Surplus i.e. Balance in Statement of Profit and Loss)6,00,0003,00,000
(2)Long-term Borrowings – 12% Debentures5,00,0004,00,000
(3)Short-term Borrowings – Bank Overdraft1,70,0001,75,000
(4)Short-term Provisions – Provision for Tax2,00,0001,65,000
(5)Tangible Assets – Machinery26,00,00020,00,000
(5)Less Accumulated Depreciation(2,00,000)(1,00,000)
(5)24,00,00019,00,000
(6)Intangible Assets – Goodwill4,00,0003,00,000

Additional Information :

  1. ₹ 1,00,000, 12% Debentures were issued on 1st April, 2021.
  2. A piece of machinery costing ₹ 80,000 on which accumulated depreciation was ₹ 40,000, was sold at a gain of ₹ 10,000. Calculate cash flows from 'Investing Activities' and 'Financing Activities'.
CBSECBSE Class XII Board 2023Subjective· 6mImportance★★★★★
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Cash Flow from Investing Activities: ₹(6,00,000) (net outflow); Cash Flow from Financing Activities: ₹2,35,000 (net inflow, after ₹60,000 interest paid on debentures).


Concept and Treatment

A Cash Flow Statement classifies cash movements into Operating, Investing and Financing activities. This question asks only for the last two.

Investing Activities capture cash from acquiring/disposing of long-term assets and investments. Cash paid to buy fixed assets/investments is an outflow; cash received on their sale is an inflow.

Financing Activities reflect changes in the size/composition of equity and borrowings — issue of shares/debentures (inflows), repayment of borrowings (outflows). For a non-financial company, interest paid on borrowings is a financing outflow, so interest on the 12% debentures must be shown here. An increase in Reserves and Surplus is retained profit (part of Operating), not a financing inflow.


A. Cash Flow from Investing Activities

Particulars(₹)(₹)
Sale of Machinery (W.N.1)50,000
Purchase of Machinery (W.N.2)(6,80,000)
Purchase of Goodwill (W.N.3)(1,00,000)
Sale of Non-current Investments (W.N.4)1,00,000
Sale of Current Investments (W.N.5)30,000
Net Cash Used in Investing Activities(6,00,000)

B. Cash Flow from Financing Activities

Particulars(₹)(₹)
Issue of Equity Share Capital (W.N.6)2,00,000
Issue of 12% Debentures (given)1,00,000
Interest on 12% Debentures paid (W.N.7)(60,000)
Repayment of Bank Overdraft (W.N.8)(5,000)
Net Cash from Financing Activities2,35,000

Working Notes

W.N.1 — Sale of Machinery: Book value = 80,000 − 40,000 = 40,000; add gain 10,000 → sale proceeds = ₹50,000 (inflow).

W.N.2 — Purchase of Machinery (gross-block account): Opening 20,00,000 + Purchase − 80,000 (cost of asset sold) = Closing 26,00,000 → Purchase = ₹6,80,000 (outflow).

W.N.3 — Purchase of Goodwill: 4,00,000 − 3,00,000 = ₹1,00,000 (outflow).

W.N.4 — Sale of Non-current Investments: 2,00,000 − 1,00,000 = ₹1,00,000 (inflow, at book value). …

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