Q.From the following comparative balance sheets of a company, prepare a Cash Flow Statement as per AS-3.
Equity and liabilities — Equity share capital: ₹2,00,000 (opening) → ₹3,00,000 (closing); Profit & Loss balance (retained earnings): ₹50,000 → ₹90,000; 10% Long-term loan: ₹1,00,000 → ₹60,000; Trade payables (creditors): ₹40,000 → ₹55,000.
Assets — Machinery (net): ₹2,00,000 → ₹2,80,000; Stock: ₹60,000 → ₹80,000; Trade receivables: ₹70,000 → ₹90,000; Cash and cash equivalents: ₹60,000 → ₹55,000.
Additional information: Depreciation of ₹30,000 was charged on machinery during the year; no machinery was sold.

Prepare the statement in three parts — operating, investing and financing — and confirm the net change reconciles the opening and closing cash balances.

The statement is built in three parts and then reconciled to the change in cash.

Part A — Cash flow from operating activities (indirect method).

Net profit for the year = increase in the Profit & Loss balance = ₹90,000 − ₹50,000 = ₹40,000 (no tax or dividend given).

Part B — Cash flow from investing activities.

Machinery purchased must be found first. Opening machinery ₹2,00,000 − depreciation ₹30,000 = ₹1,70,000; closing machinery is ₹2,80,000; since none was sold, machinery purchased = ₹2,80,000 − ₹1,70,000 = ₹1,10,000.

Part C — Cash flow from financing activities.

Reconciliation.

Instead of adding back depreciation via net profit, some prefer to prepare a Machinery Account to derive both the depreciation and the purchase figure. Either route gives the same machinery purchase of ₹1,10,000 and the same closing cash of ₹55,00 …

A frequent error is treating the ₹40,000 increase in retained earnings as if it were the cash generated, forgetting to add back the ₹30,000 depreciation. Another is computing machinery purchased without first deducting depreciation from the opening balance, which understates the purchase. Repayment of the loan is a financing outflow and issu …