Q.For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow, viz., operating, investing and financing.

The classification of cash flows into operating, investing, and financing activities is crucial for understanding how a business generates and uses cash.

• Operating Activities are the principal revenue-generating activities of the enterprise and other activities that are not investing or financing activities.
• Investing Activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
• Financing Activities are activities that result in changes in the size and composition of the owner's capital and borrowings of the enterprise.

Let's analyze each transaction:

1. Acquired machinery for ₹2,50,000 paying 20% by cheque and executing a bond for the balance payable. The cash outflow is only for the portion paid by cheque. The bond executed for the balance is a non-cash transaction in the current period. Cash paid = 20% of ₹2,50,000 = ₹50,000 Acquisition of machinery (a long-term asset) is an investing activity.
2. Paid ₹2,50,000 to acquire shares in Informa Tech. and received a dividend of ₹50,000 after acquisition. Payment for acquiring shares is an outflow for investments. Dividend received from investments is an inflow from investments. Cash outflow for shares = ₹2,50,000 Cash inflow from dividend = ₹50,000 Net cash flow = ₹50,000 (inflow) - ₹2,50,000 (outflow) = ₹2,00,000 (net outflow) Both transactions relate to investments, hence they are investing activities.
3. Sold machinery of original cost ₹2,00,000 with an accumulated depreciation of ₹1,60,000 for ₹60,000. The cash flow from the sale of an asset is simply the sale proceeds received. The original cost, accumulated depreciation, and profit/loss on sale are relevant for accounting profit but not for the direct cash flow from the sale itself. Cash inflow from sale = ₹60,000 Sale of machinery (a long-term asset) is an investing activity.
   ✓Final answer

   1. The resulting cash flow is an outflow of ₹50,000, classified as an Investing Activity.
   2. The resulting cash flow is a net outflow of ₹2,00,000, classified as an Investing Activity.
   3. The resulting cash flow is an inflow of ₹60,000, classified as an Investing Activity.

The Cash Flow Statement is a crucial financial statement that provides information about the cash inflows and outflows of an enterprise during a specific accounting period. It classifies these cash flows into three main categories: Operating, Investing, and Financing activities. Understanding these classifications is key to correctly preparing the statement.

Here's a breakdown of each category:

• Operating Activities: These are the principal revenue-generating activities of the enterprise and other activities that are not investing or financing activities. Essentially, they represent the cash generated from the day-to-day operations of the business. Examples include cash received from customers, cash paid to suppliers, and cash paid for employee salaries.
• Investing Activities: These relate to the acquisition and disposal of long-term assets (like property, plant, and equipment) and other investments not included in cash equivalents. These activities reflect the company's investment decisions to grow or maintain its productive capacity. Examples include cash paid to purchase machinery, cash received from the sale of land, and cash received as dividends or interest on investments.
• Financing Activities: These are activities that result in changes in the size and composition of the owner's capital and borrowings of the enterprise. They show how the company raises capital and repays its debt. Examples include cash received from issuing shares, cash paid for redeeming debentures, and cash paid as dividends to shareholders.

When analysing a transaction for cash flow purposes, we must focus only on the actual movement of cash. Non-cash transactions, even if they affect assets or liabilities, are ignored for the purpose of calculating cash flow from a specific activity.

Let's apply this understanding to each transaction.

Solution

(a) Acquired machinery for ₹2,50,000 paying 20% by cheque and executing a bond for the balance payable.

Concept: The acquisition of machinery is an investing activity because it involves a long-term asset. We only consider the portion paid in cash. The bond executed for the balance is a non-cash transaction and does not result in a cash flow in the current period.

Working Note 1: Calculation of Cash Paid for Machinery

Cash paid = Total cost of machinery x Percentage paid by cheque

Cash paid = ₹2,50,000 x 20%

Cash paid = ₹50,000

The cash outflow for the acquisition of machinery is ₹50,000. This is an Investing Activity.

(b) Paid ₹2,50,000 to acquire shares in Informa Tech. and received a dividend of ₹50,000 after acquisition.

Concept:

• Acquiring shares in another company is an investment, hence it's an investing activity. This results in a cash outflow.
• Receiving a dividend on an investment is also classified as an investing activity, as it represents a return on the investment. This results in a cash inflow.

Working Note 2: Calculation of Net Cash Flow from Investing Activities

Cash outflow for acquisition of shares = ₹2,50,000

Cash inflow from dividend received = ₹50,000

Net cash flow = Cash outflow - Cash inflow

Net cash flow = ₹2,50,000 - ₹50,000

Net cash flow = ₹2,00,000 (Outflow)

The net cash outflow from these transactions is ₹2,00,000. Both components are Investing Activities.

(c) Sold machinery of original cost ₹2,00,000 with an accumulated depreciation of ₹1,60,000 for ₹60,000.

Concept: The sale of machinery, a long-term asset, is an investing activity. The cash flow is simply the amount of cash received from the sale. The original cost and accumulated depreciation are relevant for calculating profit or loss on sale, but for the cash flow statement, we only care about the actual cash inflow.

The cash inflow from the sale of machinery is ₹60,000. This is an Investing Activity.