From the information given below you are required to calculate the cash paid for the inventory: | Particulars | Amount (₹) | | --- | --- | | Inventory in the beginning | 40,000 | | Credit Purchases | 1,60,000 | | Inventory in the end | 38,000 | | Trade payables in the beginning | 14,000 | | Trade payables in the end | 14,500 |

From the information given below you are required – Class 12 Accountancy

Numerical Questions · Q2

From the information given below you are required to calculate the cash paid for the inventory:

Particulars	Amount (₹)
Inventory in the beginning	40,000
Credit Purchases	1,60,000
Inventory in the end	38,000
Trade payables in the beginning	14,000
Trade payables in the end	14,500

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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

Important

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)
Net Cash from Financing Activities	15,000
Net Increase in Cash (A+B+C)	1,21,000
Add: Opening Cash Balance	10,000
Closing Cash Balance	1,31,000

Key Formulas You Must Know

While preparing the CFS, you will need these:

Cash from Operations (Direct Method) = Cash received from customers – Cash paid to suppliers – Cash paid for expenses – Cash paid for taxes
Cash from Operations (Indirect Method) = Net Profit + Non-cash expenses (depreciation, amortisation) + Loss on sale of assets – Profit on sale of assets + Decrease in current assets – Increase in current assets + Increase in current liabilities – Decrease in current liabilities
Net Cash Flow = Total Inflows – Total Outflows

Watch out

A common mistake: treating depreciation as a source of cash. It is not. Depreciation is a non-cash expense — we add it back to net profit because it reduced profit but did not reduce cash. Similarly, profit on sale of asset is subtracted because it increased profit but did not come from operations.

The Bottom Line

The Cash Flow Statement answers one question: Where did the cash come from, and where did it go? It is not about profit — it is about liquidity. For a Class 12 exam, focus on:

Classifying each transaction into Operating, Investing, or Financing.
Adjusting net profit for non-cash items and working capital changes.
Presenting the final statement in the correct format.

Master this, and you will understand the financial health of any business — not just its earnings.

Cash paid for inventory is ₹1,59,500, computed by first finding credit purchases (given) and then adjusting for the change in trade payables.

The core idea here is simple: cash paid to suppliers is not the same as credit purchases. When a business buys inventory on credit, it records a purchase but does not pay cash immediately. The cash outflow happens later when the trade payable is settled. So, to find the actual cash paid, we start with the credit purchases figure and adjust it for the opening and closing balances of trade payables.

Think of it this way: if trade payables increase during the year, it means the business bought more on credit than it paid off — so cash paid is less than purchases. If trade payables decrease, the business paid off more than it bought — so cash paid is more than purchases. The formula is:

Cash paid to suppliers = Credit Purchases + Opening Trade Payables – Closing Trade Payables

Why this formula? Because opening payables represent the amount owed at the start of the year. During the year, the business makes credit purchases (adding to the amount owed) and makes cash payments (reducing the amount owed). The closing payables are what remains unpaid. Rearranging the accounting equation for payables gives us the cash paid.

Let’s apply it step by step.

Step 1: Identify the given figures

Inventory at beginning: ₹40,000
Credit Purchases: ₹1,60,000
Inventory at end: ₹38,000
Trade payables at beginning: ₹14,000
Trade payables at end: ₹14,500

Note: The inventory figures are not directly needed for this calculation. They are given perhaps to distract or for a different part of a larger problem. Here, we only need purchases and payables.

Step 2: Apply the formula

Cash paid for inventory = Credit Purchases + Opening Trade Payables – Closing Trade Payables

= ₹1,60,000 + ₹14,000 – ₹14,500

= ₹1,59,500

Watch out

A common mistake is to include inventory changes in this calculation. Inventory affects cost of goods sold, not cash paid to suppliers. Cash paid is purely about settling payables. Do not add or subtract inventory figures here.

Tip

If you ever forget the formula, just think: Opening payables + Purchases – Cash paid = Closing payables. Rearranging gives Cash paid = Opening payables + Purchases – Closing payables.

Step 3: Verify with the official answer

The official NCERT answer key states ₹1,59,500, which matches our calculation exactly.

✓Final answer

The cash paid for inventory is ₹1,59,500. This is derived by taking credit purchases of ₹1,60,000, adding the opening trade payables of ₹14,000, and subtracting the closing trade payables of ₹14,500.

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