Q.(Question 11 — do any two of three sub-parts) Explain any four limitations of cash flow statement.
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🔒 Start your 14-day free trial to unlock the full solution →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) |
A cash flow statement is useful, but it has limits because it ignores non-cash items and can be misread. …
Cash flow statement ignores non-cash items, is not a profit measure, can be window-dressed, and ignores accrual.
Limitations of a Cash Flow Statement:
- Ignores non-cash transactions — issue of shares/debentures for purchase of assets, depreciation, etc. are not shown as cash flows.
- Not a substitute for the Income Statement — it reports cash movements, not profit; a firm may have high cash yet low profit.
- Based on historical data — it is prepared from past figures and may not reflect future cash position.
- Can be manipulated/window-dressed — by advancing receipts or postponing payments near the year-end. …
Showing the 12 most recent of 15 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.Reduction in goodwill in current year as compared to previous year is _____.(a) sale of goodwill(b) purchase of goodwill(c) written off goodwill(d) All of the above
›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). …
- 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:
- Two years' Balance Sheets (A) give the opening and closing position of assets, liabilities and capital, revealing changes. …
- 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 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 markQ.State the main purpose of preparing Cash Flow Statement.
›Reveal solutionSolution
The main purpose of a Cash Flow Statement is to show the inflows and outflows of cash during a period, helping users assess the enterprise's liquidity and cash-generating ability.
A Cash Flow Statement is prepared to:
- Provide information about the sources (inflows) and applications (outflows) of cash and cash equivalents of an enterprise during a particular accounting period.
- Classify these cash flows into three distinct activities — Operating, Investing, and Financing — so users can see exactly where cash was generated and where it was spent.
- Help users of financial statements (management, investors, creditors) evaluate the firm's ability to generate cash, meet its obligations, pay dividends, and fund its operating and investing needs without relying excessively on external financing. …
- CBSE 2023Set ANNUAL1 markMCQQ.If the net profit earned during the year is ₹ 1 lakh and the increase in debtors during the year is ₹ 25,000, what will be the amount of cash from operation?(a) ₹ 25,000(b) ₹ 50,000(c) ₹ 75,000(d) ₹ 1,25,000
›Reveal solutionSolution
Cash from operations = Net profit − increase in debtors = 1,00,000 − 25,000 = ₹ 75,000 — answer (c).
This WBCHSE HS Accountancy MCQ tests adjusting profit for a change in debtors to arrive at cash from operations.
An increase in debtors (trade receivables) means credit sales of that amount were included in profit but not yet collected in cash, so it must be deducted from net profit:
| Particulars | ₹ |
|---|---| …
- CBSE 2023Set ANNUAL1 markMCQQ.Sweat equities are issued to (A) Employees (B) Directors (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
Net loss (50,000) adjusted for working-capital changes — Debtors down 5,000 (+), Creditors down 2,000 (−), Bills Receivable up 2,000 (−), Prepaid expenses down 1,000 (+) — gives net cash used in operations of Rs. 48,000.
First work out the change in each current item and its effect on cash. A decrease in a current asset releases cash (+), an increase in a current asset blocks cash (−); an increase in a current liability brings cash (+), a decrease in a current liability uses cash (−).
Item 2020 (Rs.) 2021 (Rs.) Change Effect on cash (Rs.) Debtors 20,000 15,000 Decrease 5,000 +5,000 Creditors 10,000 8,000 Decrease 2,000 −2,000 Bills Receivable 6,000 8,000 Increase 2,000 −2,000 Prepaid expenses 8,000 7,000 Decrease 1,000 +1,000 Net change in working capital +2,000 Cash flow from operating activities (indirect method):
| Particulars | Amount (Rs.) |
| --- | --- | …
- CBSE 2023Set ANNUAL1 markMCQQ.Cash flow statement is prepared from (A) Balance sheet (B) Profit and Loss account (C) Additional information (D) All of these
›Reveal solutionSolution
A cash flow statement is prepared using comparative Balance Sheets, the Statement of Profit and Loss and additional information together.
To prepare a cash flow statement, the following are needed:
- Balance Sheets of two years (to find changes in assets, liabilities and capital).
- Profit and Loss Account (to find profit, non-cash charges like depreciation, etc.). …
- CBSE 2023Set ANNUAL1 markMCQQ.If the net profit earned during the year is ₹ 75,000 and stock in the beginning and at the end of year is ₹15,000 and ₹1,00,000 respectively, then the cash flow from operating activities will be :- A) ₹10,000 B) ₹(10,000) C) ₹1,60,000 D) ₹(1,60,000)
›Reveal solutionSolution
Net profit ₹75,000 − increase in stock ₹85,000 = ₹(10,000) cash used in operations.
Using the indirect method, a change in a current asset adjusts operating cash flow: an increase in a current asset (here, stock) is deducted because cash has been tied up in it.
Particulars ₹ Net profit 75,000 - CBSE 2023Set ANNUAL1 markQ.Bhavesh Ltd. made a net profit ₹75,000 after a transfer to general Reserve of ₹15,000 and gain on sale of machinery is ₹10,000, then calculate the cash flow from operating activities.
›Reveal solutionSolution
75,000 + 15,000 (reserve add-back) − 10,000 (gain on machinery) = ₹80,000.
To reach cash from operations we start from net profit, add back appropriations such as transfer to reserve, and remove gains that belong to investing activities.
Particulars ₹ Net profit (after transfer to general reserve) 75,000 Add: Transfer to General Reserve (appropriation) 15,000
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