Read the following hypothetical text and answer the given question on this basis : Madhav is a young entrepreneur. On 1st April, 2019, he formed a partnership firm with two of his friends, Mohan and Sohan. They started their business of exporting dry fruits. Their business was a successful business. Now they wanted to expand the business in many other countries. For meeting the financial requirements, they changed the form of business organisation and formed Madhav Ltd. The Balance Sheet of Madhav Ltd. as at 31.3.2022 was as follows : Balance Sheet of Madhav Ltd. as at 31st March, 2022
| Particulars | Note No. | 31.3.2022 ₹ | 31.3.2021 ₹ |
|---|---|---|---|
| I – Equity and Liabilities : | |||
| 1. Shareholders’ Funds | |||
| (a) Share Capital | 35,00,000 | 25,00,000 | |
| (b) Reserves and Surplus (Statement of P & L) | 12,50,000 | 10,00,000 | |
| 2. Non-Current Liabilities | |||
| Long-term Borrowings (10% Debentures) | 12,50,000 | 3,50,000 | |
| 3. Current Liabilities | |||
| (a) Short-term Borrowings (Bank Overdraft) | 50,000 | 75,000 | |
| (b) Trade Payables | 2,50,000 | 1,50,000 | |
| (c) Short-term Provisions | 1 | 1,50,000 | 75,000 |
| Total | 64,50,000 | 41,50,000 | |
| II – Assets : | |||
| 1. Non-Current Assets | |||
| Fixed Assets | |||
| (a) Tangible Assets | 2 | 40,00,000 | 22,50,000 |
| (b) Intangible Assets (Goodwill) | 3,50,000 | 5,00,000 | |
| 2. Current Assets | |||
| (a) Inventories | 6,25,000 | 5,00,000 | |
| (b) Trade Receivables | 12,50,000 | 7,50,000 | |
| (c) Cash and Cash Equivalents | 2,25,000 | 1,50,000 | |
| Total | 64,50,000 | 41,50,000 |
Notes to Accounts :
| Note No. | Particulars | 31.3.2022 ₹ | 31.3.2021 ₹ |
|---|---|---|---|
| 1 | Short term Provisions | ||
| Provision for Tax | 1,50,000 | 75,000 | |
| 2 | Tangible Assets | ||
| Plant and Machinery | 44,00,000 | 25,00,000 | |
| Less Accumulated Depreciation | (4,00,000) | (2,50,000) | |
| 40,00,000 | 22,50,000 |
Additional Information :
- A part of the machine costing ₹ 1,25,000 accumulated depreciation thereon being ₹ 50,000 was sold for ₹ 45,000 during the year.
- Interest of ₹ 1,25,000 was paid on Debentures. Calculate cash flows from ‘Investing activities’ and ‘Financing activities’ of Madhav Ltd. from the information provided above.
You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
Start your 14-day free trial to unlock the full solution →Cash flow from Investing activities is a net outflow of ₹19,80,000; Cash flow from Financing activities is a net inflow of ₹17,50,000.
Let’s begin with the concept. A Cash Flow Statement (AS-3) classifies all cash movements into three activities: Operating, Investing, and Financing. The question asks specifically for Investing and Financing activities. We are given a comparative Balance Sheet and two additional notes — one about a machine sale and one about debenture interest paid.
The key principle: we reconstruct the cash effect of each non-current asset purchase/sale (investing) and each change in equity/debt (financing), adjusting for non-cash items like depreciation and profit/loss on sale.
Step 1 – Cash Flow from Investing Activities
Investing activities include purchase and sale of fixed assets (tangible and intangible), and any interest/dividend received. Here, we have:
- Tangible Assets (Plant & Machinery) – we need to find the cash paid for new machinery and cash received from sale.
- Intangible Assets (Goodwill) – the decrease from ₹5,00,000 to ₹3,50,000 suggests no purchase; only amortisation or impairment (non-cash). No cash flow here.
- No other investing items (no loans given, no investments in shares, etc.).
Working Note 1: Machinery Account – Purchase and Sale
We prepare a T-account for Plant & Machinery (at cost) to find the cost of machinery purchased.
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Balance b/d (1.4.2021) | 25,00,000 | By Bank (sale of machine) | 45,000 |
| To Bank (purchase – balancing figure) | 20,25,000 | By Accumulated Depreciation on machine sold | 50,000 |
| By Loss on Sale of Machine (balancing figure) | 30,000 | ||
| By Balance c/d (31.3.2022) | 44,00,000 | ||
| Total | 45,25,000 | Total | 45,25,000 |
Explanation:
- Opening cost = ₹25,00,000 (from Note 2, 31.3.2021).
- Closing cost = ₹44,00,000 (31.3.2022).
- Machine sold had cost ₹1,25,000. So, cost of machine purchased = Closing + Cost of sold – Opening = 44,00,000 + 1,25,000 – 25,00,000 = ₹20,25,000.
- Sale proceeds = ₹45,000 (given).
- Accumulated depreciation on sold machine = ₹50,000 (given).
- Book value of sold machine = Cost – Accumulated Depreciation = 1,25,000 – 50,000 = ₹75,000.
- Loss on sale = Book value – Sale proceeds = 75,000 – 45,000 = ₹30,000. This loss is a non-cash item and will be added back in operating activities (not needed here).
Working Note 2: Cash paid for purchase of machinery
From Working Note 1, cash paid = ₹20,25,000.
Working Note 3: Cash received from sale of machinery
Given: ₹45,000.
Working Note 4: Goodwill
Goodwill decreased from ₹5,00,000 to ₹3,50,000. This is a non-cash amortisation/impairment. No cash flow.
Investing Activities Summary
| Particulars | Amount (₹) |
|---|---|
| Purchase of Plant & Machinery | (20,25,000) |
| Sale of Plant & Machinery | 45,000 |
| Net Cash Flow from Investing Activities | (19,80,000) |
A common mistake is to include the loss on sale of machinery (₹30,000) as a cash outflow. It is not — it is a non-cash charge. Only the actual sale proceeds (₹45,000) and purchase cost (₹20,25,000) affect cash.
Step 2 – Cash Flow from Financing Activities
Financing activities include changes in share capital, long-term borrowings, short-term borrowings (if they are of a financing nature — here bank overdraft is a short-term borrowing, but it is usually classified under financing), and payment of interest/dividends.
From the Balance Sheet:
- Share Capital increased from ₹25,00,000 to ₹35,00,000. Increase = ₹10,00,000. This is cash inflow from issue of shares (assuming no bonus issue or conversion — no such info given).
- Reserves and Surplus (P&L) increased from ₹10,00,000 to ₹12,50,000. This is not a cash flow; it is profit earned. Ignore here.
- Long-term Borrowings (10% Debentures) increased from ₹3,50,000 to ₹12,50,000. Increase = ₹9,00,000. This is cash inflow from issue of debentures.
- Short-term Borrowings (Bank Overdraft) decreased from ₹75,000 to ₹50,000. Decrease = ₹25,000. This is a cash outflow (repayment of overdraft). …
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.