Q.(a) The following information was obtained about the cash flows of XYZ Ltd. for the year ended 31st March, 2025 : Cash inflows from operating activities ₹ 28,000; cash used in investing activities ₹ 32,000 and cash inflows from financing activities ₹ 5,000. If the opening balance of cash and cash equivalents on 1st April, 2024 was ₹ 25,000, the closing balance of cash and cash equivalents on 31st March, 2025 will be : (A) ₹ 90,000 (B) ₹ 6,000 (C) ₹ 26,000 (D) ₹ 70,000
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🔒 Start your 14-day free trial to unlock the full solution →Part (a)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) |
Part (b)Concept understanding — Profit Before Tax
Profit Before Tax (PBT) – A First Look
Think of a business like a small shop you run. At the end of the year, you add up all the money you earned from selling goods (revenue) and subtract all the money you spent on buying stock, paying rent, electricity, and salaries. What remains is your profit — the reward for your effort.
But here's the catch: before you can take that profit home, the government wants its share — income tax. So the profit you calculate before paying tax is called Profit Before Tax (PBT). After you pay tax, what's left is Profit After Tax (PAT) — the amount you can actually keep or reinvest.
Precise Meaning (as per NCERT Class 12 Accountancy)
In the context of a company's financial statements, Profit Before Tax is the net profit earned by the company from its operations and other activities before deducting the provision for income tax.
It appears in the Statement of Profit and Loss (the new name for the Profit & Loss Account under Companies Act, 2013). The format is:
Profit Before Tax = Revenue from Operations + Other Income – Total Expenses (excluding tax)
Where total expenses include:
- Cost of materials consumed / purchases
- Changes in inventories
- Employee benefit expenses
- Depreciation and amortisation
- Finance costs (interest)
- Other expenses (rent, repairs, etc.)
Why Does PBT Matter?
- It shows operating efficiency – PBT tells you how well the business is doing before the taxman's cut. A company with high PBT but low PAT might be paying heavy taxes (or has deferred tax issues).
- It's used for comparisons – Different companies may face different tax rates (e.g., new manufacturing units get tax holidays). Comparing PBT (instead of PAT) gives a fairer picture of their core performance.
- It's the base for tax calculation – The company estimates its tax liability on PBT and creates a provision.
Accounting Treatment – Which Account is Debited/Credited?
In the Statement of Profit and Loss, the treatment is straightforward:
- Debit side (expenses): All expenses are debited.
- Credit side (incomes): All revenues and gains are credited.
- The balancing figure after all items (except tax) is Profit Before Tax – shown on the credit side.
- Then, Less: Provision for Tax is shown as a deduction from PBT to arrive at Profit After Tax.
Journal entry for creating tax provision:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Profit & Loss A/c (or Statement of P&L) Dr. | XXX | |||
| To Provision for Tax A/c | XXX | |||
| (Being provision for income tax created) |
- Debit: Profit & Loss (Statement of P&L) – reduces the profit.
- Credit: Provision for Tax – a current liability shown in the Balance Sheet.
When tax is actually paid later:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Provision for Tax A/c Dr. | XXX | |||
| To Bank A/c | XXX | |||
| (Being tax paid) |
Format of Statement of Profit and Loss (as per NCERT – Part I of Schedule III)
Below is the relevant portion showing how PBT appears. Note: This is a simplified extract.
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| I. Revenue from Operations | 10,00,000 | |
| II. Other Income | 50,000 | |
| III. Total Revenue (I + II) | 10,50,000 | |
| IV. Expenses: |
Part (a)
Net change = Operating + Investing + Financing = ₹28,000 - ₹32,000 + ₹5,000 = ₹1,000 (net increase). Closing = Opening + Net change = ₹25,000 + ₹1,000 = ₹26,000. …
Part (a): closing cash and cash equivalents = ₹26,000, option (C). Part (b): net profit before tax = ₹1,22,000, option (C).
Part (a)
"Cash used in" investing is an outflow (negative).
| Particulars | Amount (₹) |
|---|---|
| Opening balance (1 Apr 2024) | 25,000 |
| Add: Operating inflow | 28,000 |
| Less: Investing outflow | (32,000) |
| Add: Financing inflow | 5,000 |
Showing the 12 most recent of 24 on this concept.
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›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 cas …
- 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). …
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›Reveal solutionSolution
Gross profit is the difference between net sales and the cost of goods sold; operating and net profit come only after further expenses. Hence the answer is (B) Gross profit.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, the profit measures build up in stages:
- Gross Profit = Net Sales - Cost of Goods Sold.
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- 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:
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›Reveal solutionSolution
Any interest the company pays on its borrowings is classified under "Finance Costs" in the Statement of Profit and Loss.
Explanation
Schedule III (Part II) requires the Statement of Profit and Loss to show expenses under specific sub-headings, one of which is Finance Costs — covering interest expense on borrowings (term loans, bank loans, debentures, etc.), other borrowing costs, and applicable exchange differences treated as an adjustment to interest cost.
…
- CBSE 2025Set ANNUAL1 markQ.From the following information, what is the total amount to be shown under the sub-heading "Other Incomes" in the Profit & Loss statement of a Company? Credit Sales — Rs. 1,50,000 Cash Sales — Rs. 2,50,000 Gain on sale of fixed asset — Rs. 1,10,000
›Reveal solutionSolution
"Other Income" captures only non-operating gains that are incidental to the main business — regular sales, whether on credit or in cash, are always Revenue from Operations, never Other Income.
Step-by-step classification
Item Classification Amount shown under "Other Incomes" Credit Sales Revenue from Operations — Cash Sales Revenue from Operations — Gain on sale of fixed asset Other Income (non-operating gain) Rs. 1,10,000 … - 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. …
- CBSE 2024Set MARCH1 markMCQQ.Which of the following is included in financial expense?(a) Factory expenses(b) Administrative expenses(c) Sales expenses(d) Interest expenses
›Reveal solutionSolution
Interest expense is a financial expense, so option (d) is correct.
In this GSEB Class-12 Commerce financial-statements topic, financial (finance) costs are the costs of raising and using borrowed funds - mainly interest on loans/debentures. Factory expenses, administrative e …
- CBSE 2024Set MARCH1 markQ.When the changes in stock is negative, whether it will be added to cost of goods sold or deducted?
›Reveal solutionSolution
A negative change in stock is deducted from cost of goods sold.
In this GSEB Class-12 Commerce financial-statements topic, 'Changes in inventories' = Opening stock - Closing stock. When this figure is negative, it means the closing stock is greater than the opening stock (stock has increased during the year). Since more goods remain unsold, the cost of goods actually sold is lower, so the negative change is *deducted …
- 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 - 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 | …
- CBSE 2024Set ANNUAL1 markMCQQ.Which statement provides information about the profitability of the company?(a) Income statement(b) Statement of Retained earnings(c) Financial position statement(d) Statement of cost
›Reveal solutionSolution
The income statement shows profitability - option (a).
The income statement (Statement of Profit and Loss) matches the revenues of the period against its expenses and arrives at the net profit or loss; it therefore conveys how profitable the company is. The statement of financial position (Balance Sheet) shows the posi …
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