Q.What will be effect of 'Purchase of Marketable Securities for Cash' on Cash Flow Statement ? (A) No effect (B) Inflow from financing activities (C) Outflow from investing activities (D) Outflow from financing activities
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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) |
Marketable securities are highly liquid, short-term investments that qualify as cash equivalents under AS-3. Purchasing them for cash simply shifts funds from one component of cash and cash equivalents (cash) to another (marketable securities), lea …
Marketable securities are treated as cash equivalents, so buying them for cash is only a movement between components of cash and cash equivalents and has no effect on the Cash Flow Statement. The correct option is (A).
Under AS-3, 'Cash and Cash Equivalents' includes cash in hand, demand deposits, and short-term highly liquid investments that are readily convertible into known amounts of cash and are subject to insignificant risk of change in value. Marketable securities held for short-term purposes fall within this definition of cash equivalents. …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2026Set ANNUAL4 marksQ.Hari & Company earned a profit of ₹ 50,000 in the year ending 31-03-2018. Based on the following information make a cash flow statement from the operations : Particulars | 31-03-2017 (₹) | 31-03-2018 (₹) Stock | 14,000 | 12,000 Trade receivable | 40,000 | 50,000 Prepaid rent | 2,000 | 3,000 Trade payable | 30,000 | 35,000 Outstanding expenses | 4,000 | 3,000
›Reveal solutionSolution
50,000 + 2,000 − 10,000 − 1,000 + 5,000 − 1,000 = Rs. 45,000.
Calculation (2017 → 2018):
Net profit = 50,000
- Stock 14,000 → 12,000 = decrease 2,000 → add 2,000
- Trade Receivable 40,000 → 50,000 = increase 10,000 → less 10,000
- Prepaid Rent 2,000 → 3,000 = increase 1,000 → less 1,000
- Trade Payable 30,000 → 35,000 = increase 5,000 → add 5,000 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2026Set ANNUAL4 marksQ.From the following information, calculate cash flow from operating activities : Particulars | Year 2022 (₹) | Year 2021 (₹) Debtors | 14,000 | 11,000 Outstanding expenses | 3,000 | 1,000 Prepaid expenses | 2,000 | 2,500 Creditors | 14,000 | 16,000 Profit during the year 2017 is ₹ 25,000.
›Reveal solutionSolution
25,000 − 3,000 + 2,000 + 500 − 2,000 = Rs. 22,500.
Calculation (2021 → 2022):
Net profit = 25,000
- Debtors 11,000 → 14,000 = increase 3,000 → less 3,000
- Outstanding Expenses 1,000 → 3,000 = increase 2,000 → add 2,000
- Prepaid Expenses 2,500 → 2,000 = decrease 500 → add 500 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2025Set ANNUAL4 marksQ.Calculate cash flow from operating activities from the following information: Particulars | Year 2022 (Rs.) | Year 2021 (Rs.) Debtors | 30,000 | 24,000 Outstanding expenses | 6,000 | 2,000 Prepaid expenses | 4,000 | 5,000 Creditors | 26,000 | 30,000 Profit for the year 2022 is Rs. 50,000.
›Reveal solutionSolution
50,000 − 6,000 + 4,000 + 1,000 − 4,000 = Rs. 45,000.
Calculation (2021 → 2022):
Net profit = 50,000
- Debtors 24,000 → 30,000 = increase 6,000 → less 6,000
- Outstanding Expenses 2,000 → 6,000 = increase 4,000 → add 4,000
- Prepaid Expenses 5,000 → 4,000 = decrease 1,000 → add 1,000 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2025Set ANNUAL4 marksQ.Calculate cash flow from operating activities from the following information: Particulars | Year 2021 (Rs.) | Year 2020 (Rs.) Balance of Profit and Loss Account | 54,750 | 27,000 Trade receipts | 11,250 | 13,950 Outstanding expenses | 10,200 | 17,850 Patent | - | 18,000 Prepaid expenses | 14,000 | 12,000 Trade payables | 32,000 | 44,000
›Reveal solutionSolution
Profit 27,750 + patents 18,000 + WC adjustments → operating cash flow Rs. 26,800.
Step 1 — profit: P&L 27,000 (2020) → 54,750 (2021) = increase Rs. 27,750.
Step 2 — non-cash: Patent 18,000 → nil = Rs. 18,000 written off, added back.
Step 3 — working-capital changes (2020 → 2021):
- Trade receipts 13,950 → 11,250 = decrease 2,700 → add
- Outstanding Expenses 17,850 → 10,200 = decrease 7,650 → less …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2024Set ANNUAL4 marksQ.Calculate the cash flow from the following operating activities. Particular | 31-03-2007 | 31-03-2008 Profit and Loss A/c. | 1,20,000 | 1,10,000 Debtors | 62,000 | 50,000 Outstanding Rent | 42,000 | 24,000 Prepaid Insurance | 4,000 | 8,000 Creditor | 38,000 | 26,000 Goodwill | 76,000 | 80,000
›Reveal solutionSolution
Loss Rs. 10,000 + working-capital changes = net operating cash OUTFLOW of Rs. 32,000.
Step 1 — profit/loss: P&L 1,20,000 (2007) → 1,10,000 (2008) = decrease Rs. 10,000 (loss).
Step 2 — working-capital changes (2007 → 2008):
- Debtors 62,000 → 50,000 = decrease 12,000 → add 12,000
- Outstanding Rent 42,000 → 24,000 = decrease 18,000 → less 18,000
- Prepaid Insurance 4,000 → 8,000 = increase 4,000 → less 4,000
- Creditors 38,000 → 26,000 = decrease 12,000 → less 12,000 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2024Set ANNUAL4 marksQ.Hari and Company earned Rs. 50,000 as profit on the year ending 31-03-2018. Prepare cash flow statement from the following information on the basis of operating activities. Particulars | 31-03-2017 | 31-03-2018 Stock | 14,000 | 12,000 Trade Received | 40,000 | 50,000 Prepaid Rent | 2,000 | 3,000 Outstanding Expenses | 4,000 | 3,000 Trade Liabilities | 30,000 | 35,000
›Reveal solutionSolution
50,000 + 2,000 − 10,000 − 1,000 − 1,000 + 5,000 = Rs. 45,000.
Calculation (2017 → 2018):
Net profit = 50,000
- Stock 14,000 → 12,000 = decrease 2,000 → add 2,000
- Trade Receivable 40,000 → 50,000 = increase 10,000 → less 10,000
- Prepaid Rent 2,000 → 3,000 = increase 1,000 → less 1,000
- Outstanding Expenses 4,000 → 3,000 = decrease 1,000 → less 1,000 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2022Set ANNUAL4 marksQ.From the following information, calculate 'Cash Flow from Operating Activities': Particulars | 2019 Amount (Rs.) | 2020 Amount (Rs.) Stock | 60,000 | 50,000 Debtors | 25,000 | 23,000 Creditors | 32,000 | 28,000 Bills Payable | 35,000 | 22,000 Outstanding Expenses | 3,500 | 4,500 Accrued Income | 8,000 | 9,000 Profit & Loss A/c. | 80,000 | 90,000
›Reveal solutionSolution
Profit 10,000 adjusted for working-capital changes → operating cash flow Rs. 5,000.
Step 1 — profit: P&L 80,000 (2019) → 90,000 (2020) = increase of Rs. 10,000.
Step 2 — working-capital changes (2019 → 2020):
- Stock 60,000 → 50,000 = decrease 10,000 → add
- Debtors 25,000 → 23,000 = decrease 2,000 → add
- Creditors 32,000 → 28,000 = decrease 4,000 → less
- Bills Payable 35,000 → 22,000 = decrease 13,000 → less …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2022Set ANNUAL4 marksQ.From the given information, calculate 'Cash Flow from Operating Activities': Particulars | 2020 Amount (Rs.) | 2019 Amount (Rs.) Debtors | 30,000 | 24,000 Outstanding Expenses | 6,000 | 2,000 Creditors | 26,000 | 30,000 Prepaid Expenses | 4,000 | 5,000 Profit during the year 2020 was Rs. 50,000
›Reveal solutionSolution
50,000 − 6,000 + 4,000 − 4,000 + 1,000 = Rs. 45,000.
Calculation (2019 → 2020):
Net profit = 50,000
- Debtors 24,000 → 30,000 = increase 6,000 → less 6,000
- Outstanding Expenses 2,000 → 6,000 = increase 4,000 → add 4,000
- Creditors 30,000 → 26,000 = decrease 4,000 → less 4,000 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2021Set ANNUAL4 marksQ.Calculate Cash Flow from operating activities with the help of the following information : Particulars | 31-3-2018 (₹) | 31-3-2017 (₹) Balance in Statement of Profit and Loss | 54,750 | 27,000 Trade Receivables | 11,250 | 13,950 Outstanding Expenses | 10,200 | 17,850 Patents | – | 18,000 Prepaid Expenses | 14,000 | 12,000 Trade Payables | 32,000 | 44,000
›Reveal solutionSolution
Profit 27,750 + patents 18,000 + WC adjustments = operating cash flow Rs. 26,800.
Step 1 — profit for the year: P&L balance 27,000 (2017) → 54,750 (2018) = increase of Rs. 27,750.
Step 2 — add non-cash item: Patents fell 18,000 → nil = Rs. 18,000 written off, added back.
Step 3 — working-capital changes (2017 → 2018):
- Trade Receivables 13,950 → 11,250 = decrease 2,700 → add 2,700
- Outstanding Expenses 17,850 → 10,200 = decrease 7,650 (liability down) → less 7,650 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2021Set ANNUAL4 marksQ.From the following information, calculate cash from operating activities : Particulars | Year 2020 (₹) | Year 2019 (₹) Debtors | 15,000 | 12,000 Outstanding Expenses | 3,000 | 1,000 Prepaid Expenses | 2,000 | 2,500 Creditors | 13,000 | 15,000 Profit during the year 2020 is ₹ 25,000
›Reveal solutionSolution
25,000 − 3,000 + 2,000 + 500 − 2,000 = Rs. 22,500.
Calculation (indirect method), 2019 → 2020:
Net profit = 25,000
- Debtors 12,000 → 15,000 = increase 3,000 → less 3,000
- Outstanding Expenses 1,000 → 3,000 = increase 2,000 → add 2,000
- Prepaid Expenses 2,500 → 2,000 = decrease 500 → add 500 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2020Set ANNUAL4 marksQ.From the following information, calculate Cash Flow from operating activities: Particulars | Year 2017 (Rs.) | Year 2016 (Rs.) Debtors | 15,000 | 12,000 Outstanding Expenses | 3,000 | 1,000 Prepaid Expenses | 2,000 | 2,500 Creditors | 13,000 | 15,000 Profit during the year 2017 was Rs. 25,000.
›Reveal solutionSolution
Operating cash flow = 25,000 − 3,000 + 2,000 + 500 − 2,000 = Rs. 23,500.
Calculation (indirect method):
Net profit for the year = 25,000
Adjustments for changes in working capital (2016 → 2017):
- Debtors increased 12,000 → 15,000 = +3,000 → less 3,000
- Outstanding Expenses increased 1,000 → 3,000 = +2,000 → add 2,000
- Prepaid Expenses decreased 2,500 → 2,000 = −500 → add 500 …
- CGBSE Chhattisgarh Higher Secondary Class 12 (Commerce) 2020Set ANNUAL4 marksQ.Calculate Cash Flow Statement from the following information: Particulars | 31-3-2017 (Rs.) | 31-3-2018 (Rs.) Profit and Loss A/c. | 1,20,000 | 1,10,000 Debtors | 62,000 | 50,000 Outstanding Rent | 42,000 | 24,000 Prepaid Insurance | 4,000 | 8,000 Creditors | 38,000 | 26,000 Goodwill | 76,000 | 80,000
›Reveal solutionSolution
Loss Rs. 10,000 adjusted for working-capital changes gives a net operating cash OUTFLOW of Rs. 32,000.
Step 1 — profit/loss for the year: P&L A/c balance 1,20,000 (31-3-2017) → 1,10,000 (31-3-2018): a decrease of Rs. 10,000, i.e. a loss of Rs. 10,000.
Step 2 — adjust working-capital changes (2017 → 2018):
- Debtors 62,000 → 50,000 = decrease 12,000 (current asset down) → add 12,000
- Outstanding Rent 42,000 → 24,000 = decrease 18,000 (current liability down) → less 18,000
- Prepaid Insurance 4,000 → 8,000 = increase 4,000 (current asset up) → less 4,000
- Creditors 38,000 → 26,000 = decrease 12,000 (current liability down) → less 12,000 …
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