Come and sit down for a minute. If the words Cash Flow Statement make your stomach tighten a little, you are in very good company — almost every student feels that way the first week. It looks like a wall of figures, arrows and brackets, and it seems to demand that you remember a hundred rules at once.
Here is the honest truth: this chapter is one of the most learnable eight marks in the whole Accountancy paper. There is no theory to argue about, no judgement calls, no long essays. There is a fixed format, a fixed order, and a small set of adjustments that repeat year after year. Once the pattern clicks, you will be able to look at two balance sheets and produce a full statement almost on autopilot.
So we are going to build it slowly, from absolutely zero. I will not assume you remember anything from earlier chapters. Every new word gets explained the first time it appears. Every example is worked out line by line, and every single statement in this page has been checked so that the closing figure genuinely ties back to the cash on the balance sheet. When something is a common trap, I will stop and point at it.
One promise from your side, please: do not rush. Read a section, cover it with your hand, and try to rebuild it on paper. If it does not come out, read it again. Do not move on until the section feels comfortable. That is the whole method.
A quick word on your syllabus. For CBSE Class XII Accountancy (Code 055), Cash Flow Statement sits in Part B, Financial Statement Analysis, and carries 8 marks. The two balance sheets you will be handed come straight out of the Schedule III format you learnt in Financial Statements of a Company, so keep that layout fresh in your mind. The prescribed scope is: meaning, objectives, benefits, cash and cash equivalents, classification of activities and preparation as per AS 3 (Revised) — Indirect Method only. There is also something called the Direct Method, where you list actual cash receipts from customers and cash payments to suppliers. It is not in your syllabus — you only need the indirect method, so we will spend all our energy there and never look back.
What You’ll Learn
- What a Cash Flow Statement Is (And Why Profit Is Not Cash)
- Cash and Cash Equivalents — What Counts
- The Three Activities: Operating, Investing, Financing
- Classifying Interest and Dividend: Financing vs Non-Financing Company
- Operating Activities by the Indirect Method — The Ladder
- Adjusting Non-Cash and Non-Operating Items
- Changes in Working Capital
- Provision for Tax and Tax Paid
- Investing Activities in Practice
- Financing Activities in Practice
- Putting It Together — Full Format and a Complete Board-Style Question
- Benefits, Uses and Limitations of the Cash Flow Statement
- Practice Worksheet
Your Game Plan
- Day 1 — get the idea. Read the first three sections only. By the end you should be able to explain to a friend why a company can earn a profit of ₹10 lakh and still not be able to pay its electricity bill.
- Day 2 — learn the classification. Sections 3 and 4. Make a small card with three columns (Operating, Investing, Financing) and write every item you meet into the right column. Test yourself on interest and dividend until you never hesitate.
- Day 3 — master the ladder. Sections 5, 6, 7 and 8. This is the heart of the chapter. Write out the operating-activities ladder from memory five times.
- Day 4 — the other two sections. Sections 9 and 10. Practise the fixed asset account and the provision for tax account until they take you under a minute each.
- Day 5 — the full statement. Section 11. Do the complete board-style question with the page covered, then check line by line.
- Day 6 — the worksheet. All ten questions, closed book, on paper, with a clock. Then read Section 12 for the theory marks.
- Day 7 — repair day. Redo only the questions you got wrong. Nothing else.
One rule for all seven days: always finish the statement. Even if you are unsure of one adjustment, carry on to the last line and check whether your net increase equals closing cash minus opening cash. That check is your best friend in the exam hall.
Study Notes
What a Cash Flow Statement Is (And Why Profit Is Not Cash)
Imagine your friend Riya runs a small stationery shop. At the end of the year her books show a lovely profit of ₹1,50,000. She is delighted. Then the electricity bill of ₹9,000 arrives and she cannot pay it, because there is only ₹4,000 in the drawer. She has not been cheated and nobody has stolen anything. What has happened is simply this: profit and cash are two different things.
Why? Because accounts are kept on the accrual basis. A sale is recorded the moment goods are handed over, even if the customer will pay three months later. An expense is recorded when it is incurred, even if the payment is still due. And some expenses, like depreciation, never involve money leaving at all — they are just a book entry that spreads the cost of an asset over its life. So the Statement of Profit and Loss answers the question “how well did we trade?” It does not answer “how much money actually moved?”
That second question is what the Cash Flow Statement answers.
Objectives of a Cash Flow Statement. Learn these four — they are worth easy marks:
- To show the sources and applications of cash and cash equivalents during the year.
- To explain the reasons for the difference between profit and cash, so that users are not misled by the profit figure alone.
- To help users judge the enterprise’s liquidity and solvency — can it pay its bills when they fall due?
- To help in predicting future cash flows and in planning, so that management can arrange funds before a shortage happens rather than after.
| Point of difference | Profit (Statement of P&L) | Cash (Cash Flow Statement) |
|---|---|---|
| Basis | Accrual basis — recorded when earned or incurred | Cash basis — recorded when money actually moves |
| Credit sale of ₹50,000 | Increases profit at once | No cash yet — it sits in Trade Receivables |
| Depreciation of ₹20,000 | Reduces profit | No cash leaves at all |
| Machinery bought for ₹5,00,000 | Does not reduce profit (it is an asset) | A huge cash outflow |
| Can it be manipulated? | Yes, through estimates and policies | Much harder — the bank balance is a fact |
During the year Riya earned a net profit of ₹1,50,000 after charging depreciation of ₹25,000. Over the same year her trade receivables rose by ₹1,20,000, her stock rose by ₹60,000 and her trade payables rose by ₹40,000. There were no other transactions. Her opening cash was ₹50,000.
Working:
Net profit ……… ₹1,50,000
Add: Depreciation (no cash left) … ₹25,000
Less: Increase in trade receivables (money still with customers) … (₹1,20,000)
Less: Increase in stock (money now sitting on shelves) … (₹60,000)
Add: Increase in trade payables (suppliers are funding her) … ₹40,000
Cash generated from operations = ₹35,000
Closing cash = ₹50,000 + ₹35,000 = ₹85,000.
Why it works: we started from profit and then undid every entry that did not move money. Depreciation was added back because it was deducted from profit without any payment. The rise in receivables and stock was subtracted because that is profit which turned into paper and goods rather than money. The rise in payables was added because Riya has enjoyed goods without paying for them yet.
Cash and Cash Equivalents — What Counts
Before you can explain how cash moved, you must be very clear about what you are calling cash. The whole statement ends with the line “Cash and Cash Equivalents at the end of the year”, so if you put the wrong things into that basket, every figure above it becomes questionable.
Cash means cash in hand and demand deposits with banks — that is, your current account and savings account balances, plus cheques and bank drafts you are holding but have not yet deposited.
Cash equivalents means short-term, highly liquid investments that are readily convertible into a known amount of cash and are subject to an insignificant risk of change in value. In plain words: something that is almost cash already. The usual test is that it had an original maturity of three months or less from the date you acquired it. A 60-day treasury bill qualifies. A 3-year fixed deposit does not, because its value can change with interest rates and you cannot get at it quickly.
(a) Current Investments are to be taken as Marketable Securities unless otherwise specified. That means the “Current Investments” line in the balance sheet is treated as a cash equivalent — it goes into your opening and closing cash figure, and you do not show its purchase or sale in investing activities.
(b) Bank overdraft and cash credit are to be treated as short-term borrowings. That means they appear under financing activities, not as negative cash. An increase in overdraft is a financing inflow; a decrease is a financing outflow.
| Item | Part of Cash & Cash Equivalents? | Reason |
|---|---|---|
| Cash in hand | Yes | It is cash itself |
| Balance in current / savings account | Yes | Demand deposit — available instantly |
| Cheques and drafts in hand | Yes | Treated as cash received |
| Short-term deposit maturing in 2 months | Yes | Original maturity three months or less |
| Current Investments / Marketable securities | Yes | CBSE instruction — treat as cash equivalent |
| Fixed deposit maturing in 14 months | No | Long-term — an investing activity |
| Shares held as non-current investment | No | Value can change a lot — investing activity |
| Bank overdraft / cash credit | No | Short-term borrowing — financing activity |
| Trade receivables (debtors) | No | Not yet money — a working capital item |
On 31 March 2026 Neelkanth Ltd shows: cash in hand ₹12,000; cash at bank ₹68,000; cheques in hand ₹9,000; bank deposits with an original maturity of 2 months ₹40,000; current investments ₹25,000; bank deposits maturing in 14 months ₹1,00,000; bank overdraft ₹30,000. Compute cash and cash equivalents.
Included: 12,000 + 68,000 + 9,000 + 40,000 + 25,000 = ₹1,54,000.
Excluded: the 14-month deposit of ₹1,00,000 (too long — it belongs to investing activities) and the bank overdraft of ₹30,000 (a short-term borrowing — it belongs to financing activities and is not subtracted here).
Why it works: everything in the ₹1,54,000 could be turned into spendable rupees today or almost today, with no real risk of the amount changing. The overdraft is money the company owes; netting it off would hide a borrowing, which is exactly what the statement is supposed to reveal.
The Three Activities: Operating, Investing, Financing
AS 3 asks us to sort every cash movement into exactly one of three lanes. Think of a household. The salary you earn and the groceries you buy are operating. Buying or selling a house or a car is investing. Taking a loan, repaying it, or receiving money from a relative who becomes a part-owner of your business is financing. Same three ideas, company scale.
1. Operating Activities are the principal revenue-producing activities of the enterprise — the things it exists to do. For a manufacturer that means making and selling goods; for a school, running classes. AS 3 also gives a very useful catch-all: operating activities are all activities that are not investing or financing activities. So if you cannot decide, and the item is part of ordinary trading, it is operating.
2. Investing Activities are the acquisition and disposal of long-term assets and of other investments that are not cash equivalents. Buying machinery, selling old furniture, buying shares of another company as a long-term holding, and the interest or dividend earned on such holdings.
3. Financing Activities are activities that change the size and composition of the owners’ capital and the borrowings of the enterprise. Issuing shares, receiving securities premium, issuing or redeeming debentures, taking or repaying a long-term loan, moving a bank overdraft up or down, and paying dividend or interest.
| Operating | Investing | Financing |
|---|---|---|
| Cash sales and collection from trade receivables | Purchase of land, building, plant, patents | Issue of equity or preference shares |
| Cash paid to suppliers and employees | Sale of fixed assets (the whole sale proceeds) | Securities premium received on issue |
| Cash paid for rent, power, insurance | Purchase and sale of non-current investments | Issue and redemption of debentures |
| Income tax paid (unless it clearly relates to investing or financing) | Interest and dividend received (non-financial company) | Long-term loans raised or repaid; bank overdraft movement |
| Purchase and sale of goods, change in inventories and trade payables | Loans and advances given to other parties | Interim and final dividend paid; interest paid on borrowings |
Classify the following for Dhruv Textiles Ltd, a garment manufacturer:
(a) Cash received from customers — Operating (its main business).
(b) Purchase of a delivery van — Investing (a long-term asset).
(c) Wages paid to tailors — Operating.
(d) Proceeds from a fresh issue of equity shares — Financing (owners’ capital changes).
(e) Dividend received on shares held in another company — Investing (return on an investment).
(f) Interest paid on a bank term loan — Financing (cost of a borrowing).
(g) Income tax paid — Operating.
(h) Sale of an old cutting machine for ₹45,000 — Investing, and the full ₹45,000 is shown.
Why it works: ask yourself one question for each item — is this about the goods we trade in, about the assets we own for the long run, or about the people who fund us? Those three questions map exactly onto the three lanes.
During 2025–26, Sarita Ltd generated ₹2,40,000 net cash from operations, bought a building for ₹3,00,000, sold old furniture for ₹20,000, issued shares for ₹1,50,000 and paid dividend of ₹40,000. Opening cash and cash equivalents were ₹25,000.
A. Operating …… ₹2,40,000
B. Investing = (3,00,000) + 20,000 = (₹2,80,000)
C. Financing = 1,50,000 – 40,000 = ₹1,10,000
Net increase (A + B + C) = 2,40,000 – 2,80,000 + 1,10,000 = ₹70,000
Add: Opening cash and cash equivalents … ₹25,000
Closing cash and cash equivalents = ₹95,000
Why it works: whatever the size of the question, the last three lines never change — add the three activity totals, add opening cash, and you must land on closing cash. If you do not, something above is wrong. That single check will save you marks in every full-length question.
Classifying Interest and Dividend: Financing vs Non-Financing Company
This is the single most examined trap in the chapter, and it is also the easiest to master, because it depends on one question only: what kind of company is this?
For a financial enterprise — a bank, a non-banking finance company, a lending or investing company — borrowing money and lending money is the business. So the interest it pays and the interest and dividend it earns are part of its ordinary trading. They belong to operating activities.
For every other company — a manufacturer, a trader, a hotel, a school — interest and dividend are side effects of financing and investing decisions, not of trading. So interest paid is the price of a borrowing and goes to financing; interest and dividend received are the reward for an investment and go to investing.
And one item refuses to change sides. Dividend paid is a payment to the owners, so it is always a financing activity — for a bank and for a biscuit factory alike. This applies to both interim dividend (declared and paid during the year by the Board) and final dividend (declared at the AGM after the year end and therefore paid in the following year).
Interim dividend is declared and paid during the year. So it is deducted from the Surplus of the same year and shown as a financing outflow of the same year.
Final (proposed) dividend is only recommended by the Board at the year end. It becomes a liability when shareholders approve it at the AGM, which happens in the next financial year. So the final dividend relating to last year is deducted from the Surplus of the current year and shown as a financing outflow of the current year. It is not shown as a liability in the balance sheet at all — it appears only in the notes as a contingent liability.
In 2025–26 a company generated ₹4,00,000 cash from operations before considering interest, dividend and tax. It paid interest ₹30,000 on its borrowings, received interest ₹12,000 and dividend ₹8,000 on its investments, paid dividend ₹50,000 to its shareholders and paid income tax ₹60,000. Show net cash from operating activities if (i) it is a garment manufacturer, (ii) it is a non-banking finance company.
(i) Garment manufacturer (non-financial):
Cash generated from operations ₹4,00,000 – Tax paid ₹60,000 = ₹3,40,000 net cash from operating activities.
Investing gets +₹12,000 interest received and +₹8,000 dividend received = ₹20,000 inflow.
Financing gets –₹30,000 interest paid and –₹50,000 dividend paid = ₹80,000 outflow.
(ii) Non-banking finance company:
4,00,000 – 30,000 + 12,000 + 8,000 – 60,000 = ₹3,30,000 net cash from operating activities.
Investing gets nothing from these items. Financing gets only –₹50,000 dividend paid.
Why it works: notice that the total across all three activities is the same either way (₹3,40,000 + ₹20,000 – ₹80,000 = ₹2,80,000, and ₹3,30,000 + 0 – ₹50,000 = ₹2,80,000). Classification never changes how much cash a company has — it only changes the story the statement tells about where that cash came from.
Sagar Ltd, a manufacturer, paid interest ₹42,000 on its 12% debentures, received interest ₹9,000 on non-current investments, received dividend ₹6,500 on shares held in another company and paid a final dividend of ₹75,000. Where does each go?
In the operating section (adjusting the profit figure): add back interest paid ₹42,000 because it was charged against profit but is not an operating cost; deduct interest received ₹9,000 and dividend received ₹6,500 because they were credited to profit but are not operating incomes. Net effect on operating profit: +42,000 – 9,000 – 6,500 = +₹26,500.
In investing: +₹9,000 and +₹6,500 = ₹15,500 inflow. In financing: –₹42,000 and –₹75,000 = ₹1,17,000 outflow.
Why it works: every one of these items is touched twice — once to take it out of the operating section, and once to put it into its proper lane. Forgetting the second touch is the most common way students lose marks here.
Operating Activities by the Indirect Method — The Ladder
Here is the heart of the chapter. The indirect method does not go looking for actual receipts and payments. Instead it starts with the profit figure you already have and corrects it, one adjustment at a time, until what is left is real cash. (The alternative, the direct method, lists actual cash receipts from customers and payments to suppliers — it is not in your syllabus, you only need the indirect method.)
Step zero: find Net Profit before Tax. The balance sheet does not hand it to you. You must reconstruct it from the movement in Surplus, i.e. Balance in Statement of Profit and Loss. Work like this:
| Calculation of Net Profit before Tax | ₹ |
|---|---|
| Closing balance of Surplus (Statement of P&L) | xxx |
| Less: Opening balance of Surplus | (xxx) |
| Add: Transfer to General Reserve / Debenture Redemption Reserve | xxx |
| Add: Interim dividend paid during the year | xxx |
| Add: Final dividend of the previous year paid during the year | xxx |
| = Net Profit after Tax | xxx |
| Add: Provision for tax made during the current year | xxx |
| = Net Profit BEFORE Tax | xxx |
Why do we add these back? Because every one of them was a use of profit after the profit had been earned. To find out what the company actually earned this year, we have to put the appropriations back on top of the closing balance.
Rung 1. Net Profit before Tax
Rung 2. Add non-cash and non-operating expenses; subtract non-operating incomes → Operating Profit before Working Capital Changes
Rung 3. Adjust changes in current assets and current liabilities → Cash Generated from Operations
Rung 4. Subtract income tax paid → Net Cash from Operating Activities
Write these four labels on your rough sheet at the start of every question. They are the skeleton; the numbers just hang on them.
For Kavya Ltd: Surplus opening ₹60,000, closing ₹1,30,000. Transfer to General Reserve ₹50,000. Interim dividend paid ₹30,000. Provision for tax made during the year ₹90,000; Provision for Tax opening ₹40,000, closing ₹55,000. Depreciation ₹55,000; goodwill amortised ₹15,000; interest on debentures ₹24,000; profit on sale of machinery ₹10,000. Inventories rose ₹35,000; trade receivables fell ₹18,000; trade payables rose ₹22,000; outstanding expenses fell ₹7,000.
Step 0 — profit: Net profit after tax = 1,30,000 – 60,000 + 50,000 + 30,000 = ₹1,50,000. Net profit before tax = 1,50,000 + 90,000 = ₹2,40,000.
Rung 2: 2,40,000 + 55,000 (depreciation) + 15,000 (goodwill) + 24,000 (interest) – 10,000 (profit on sale) = ₹3,24,000 operating profit before working capital changes.
Rung 3: 3,24,000 – 35,000 + 18,000 + 22,000 – 7,000 = ₹3,22,000 cash generated from operations.
Rung 4 — tax paid: 40,000 + 90,000 – 55,000 = ₹75,000. So 3,22,000 – 75,000 = ₹2,47,000 net cash from operating activities.
Why it works: each rung answers one narrow question. Rung 2 asks “which charges and credits in the profit had nothing to do with operating cash?” Rung 3 asks “how much of the operating profit got stuck in stock and debtors, or was funded by creditors?” Rung 4 asks “how much tax money actually left the bank?” Never mix two questions on one line.
Adjusting Non-Cash and Non-Operating Items
Rung 2 of the ladder is where most of the marks live, so let us take it apart properly. There are two families of adjustment, and both are simple once you know which family an item belongs to.
Family A — non-cash items. These were deducted from profit but no money left the business. So add them back. Depreciation on plant, machinery, building and vehicles. Amortisation of patents, copyrights and trademarks. Goodwill written off. Preliminary expenses, discount on issue of debentures or share issue expenses written off. Loss on issue of debentures written off. Provision for doubtful debts created (when it is treated as an adjustment rather than netted off receivables).
Family B — non-operating items. These did involve money, or at least a real gain or loss, but they do not belong to operating activities. Take them out of the operating section entirely and put them in their proper lane:
- Add back non-operating expenses and losses: interest on debentures, interest on long-term loans, loss on sale of fixed assets, loss on sale of investments.
- Deduct non-operating incomes and gains: profit on sale of fixed assets, profit on sale of investments, interest received, dividend received, rent received from a let-out property held as an investment.
Finding the depreciation figure. Questions rarely hand it to you. Two situations:
Situation 1 — the asset is shown at written down value (net). Reconstruct the asset account: Opening WDV + Purchases – Depreciation – WDV of asset sold = Closing WDV. Whichever figure is missing, solve for it.
Situation 2 — the asset is shown at cost with a separate Accumulated Depreciation account. Then run two accounts. In the Accumulated Depreciation account: Opening balance + Depreciation for the year – Accumulated depreciation on the asset sold = Closing balance. In the Asset (at cost) account: Opening cost + Purchases – Cost of asset sold = Closing cost.
Machinery at cost: opening ₹8,00,000, closing ₹9,50,000. Accumulated Depreciation: opening ₹2,20,000, closing ₹2,60,000. During the year a machine costing ₹1,50,000, on which accumulated depreciation was ₹90,000, was sold for ₹45,000. Find depreciation for the year, the profit or loss on sale, and the machinery purchased.
Written down value of the machine sold = 1,50,000 – 90,000 = ₹60,000. Sold for ₹45,000, so loss on sale = ₹15,000.
Depreciation for the year = Closing accumulated 2,60,000 – Opening 2,20,000 + Accumulated depreciation removed on sale 90,000 = ₹1,30,000.
Machinery purchased = Closing cost 9,50,000 – Opening cost 8,00,000 + Cost of machine sold 1,50,000 = ₹3,00,000.
Where each figure goes: operating — add back depreciation ₹1,30,000 and loss on sale ₹15,000. Investing — outflow ₹3,00,000 for the purchase and inflow ₹45,000 from the sale.
Why it works: the accumulated depreciation account only falls for two reasons — an asset leaves, or nothing. It only rises for one reason — this year’s charge. So putting back the ₹90,000 that left with the sold machine reveals the true charge for the year.
Prakash Ltd shows Goodwill ₹1,20,000 (opening) and ₹80,000 (closing). Patents were ₹60,000 (opening) and ₹45,000 (closing); during the year patents with a book value of ₹10,000 were sold for ₹12,000. The company has 9% Debentures of ₹4,00,000 which were outstanding for the whole year. Show the effect on the operating section.
Goodwill written off = 1,20,000 – 80,000 = ₹40,000 → add back (non-cash).
Patents amortised = Opening 60,000 – Book value sold 10,000 – Closing 45,000 = ₹5,000 → add back (non-cash).
Profit on sale of patents = 12,000 – 10,000 = ₹2,000 → deduct (non-operating gain). The ₹12,000 received is an investing inflow.
Interest on debentures = 9% of ₹4,00,000 = ₹36,000 → add back, and show ₹36,000 as a financing outflow.
Net effect on operating profit = +40,000 + 5,000 – 2,000 + 36,000 = +₹79,000.
Why it works: the patents account is just an asset account with amortisation instead of depreciation. Opening minus what left minus what was written off equals closing. Once you see that pattern, patents, copyrights and trademarks stop being scary — they behave exactly like machinery.
Changes in Working Capital
Rung 3. Operating profit is not cash yet, because some of it is trapped in stock and in money owed by customers, while some of your costs have not been paid to suppliers. This rung releases that trapped profit — or admits that more got trapped.
There are only two sentences to memorise, and everything follows from them.
Current ASSETS move against you. An increase in a current asset is deducted; a decrease is added. (Your money went into stock or is sitting with a debtor.)
Current LIABILITIES move with you. An increase in a current liability is added; a decrease is deducted. (Someone else is temporarily funding you.)
Which items count as working capital here? Inventories, trade receivables, prepaid expenses, accrued income, short-term loans and advances given, other current assets — and on the other side trade payables, outstanding expenses, income received in advance, other current liabilities and short-term provisions other than provision for tax.
Which items are excluded? Three, and you must know them cold:
- Cash and cash equivalents — they are the thing being explained, so they are never an adjustment.
- Current Investments (marketable securities) — treated as cash equivalents in your syllabus, so they sit inside the cash basket, not in working capital.
- Bank overdraft and cash credit — your syllabus says these are short-term borrowings. Their movement is a financing flow, never a working capital adjustment.
Provision for tax is also kept out of working capital and handled separately, which we do in the next section.
Ambar Ltd reports (opening → closing): Inventories ₹80,000 → ₹1,05,000; Trade receivables ₹1,40,000 → ₹1,15,000; Prepaid expenses ₹8,000 → ₹12,000; Trade payables ₹90,000 → ₹1,12,000; Outstanding wages ₹6,000 → ₹4,000; Bank overdraft ₹40,000 → ₹65,000. Compute the net working capital adjustment.
Inventories up ₹25,000 → deduct 25,000
Trade receivables down ₹25,000 → add 25,000
Prepaid expenses up ₹4,000 → deduct 4,000
Trade payables up ₹22,000 → add 22,000
Outstanding wages down ₹2,000 → deduct 2,000
Bank overdraft up ₹25,000 → not here at all — it is a ₹25,000 financing inflow
Net working capital adjustment = –25,000 + 25,000 – 4,000 + 22,000 – 2,000 = +₹16,000.
If you had wrongly included the overdraft you would have got +₹41,000 — an operating figure ₹25,000 too high and a financing figure ₹25,000 too low.
Why it works: stock and prepayments are money you have parked; debtors falling means money finally arrived; creditors rising means you are holding on to cash a little longer. Every sign follows from asking “did this change put money in my hand or take it out?”
Provision for Tax and Tax Paid
Tax is charged against profit in one year and usually paid in another, so the amount provided and the amount paid are two different numbers. The ladder needs both: you add the provision back at the top (to get profit before tax) and subtract the payment at the bottom (because that is the cash that really left).
The tool for this is a small Provision for Tax account, which you can write in four lines.
| Provision for Tax Account | ₹ |
|---|---|
| Opening balance (what was still owing) | xxx |
| Add: Provision made during the year (charged to Statement of P&L) | xxx |
| Less: Closing balance (what is still owing now) | (xxx) |
| = Tax PAID during the year | xxx |
Case A — full information. Provision for Tax: opening ₹55,000, closing ₹70,000. Tax provided during the year ₹82,000.
Tax paid = 55,000 + 82,000 – 70,000 = ₹67,000. Add ₹82,000 back to net profit after tax to reach net profit before tax; subtract ₹67,000 at the bottom of the operating section.
Case B — only the balances. Provision for Tax: opening ₹55,000, closing ₹70,000. Nothing else is said.
Tax paid = ₹55,000 (assume the opening liability was cleared). Amount added back to profit = ₹70,000 (assume the closing balance is this year’s provision).
Why it works: in Case A the account is fully determined, so you solve it. In Case B you are short of one figure, so the standard assumption fills the gap in the most reasonable way — last year’s bill got paid, this year’s bill is still outstanding. State the assumption in a working note and you keep the marks.
Investing Activities in Practice
Section B of the statement. The rule here is short: show the actual cash. Money paid to buy a long-term asset is an outflow; money received on selling one is an inflow; and for a non-financial company the interest and dividend earned on long-term investments are inflows too.
Everything hard about this section is really about finding the purchase figure, because questions almost never state it. You find it by reconstructing the asset account. Three patterns cover nearly every question:
| Situation | How to find the missing figure |
|---|---|
| Asset shown at written down value | Purchases = Closing WDV – Opening WDV + Depreciation for the year + WDV of asset sold |
| Asset at cost + separate Accumulated Depreciation | Purchases = Closing cost – Opening cost + Cost of asset sold. Depreciation = Closing accumulated – Opening accumulated + Accumulated depreciation on asset sold |
| Non-current investments | Purchases = Closing – Opening + Cost (book value) of investments sold. Profit or loss on sale = Sale proceeds – Book value |
Vidhi Ltd, a manufacturer, reports (opening → closing): Land ₹3,00,000 → ₹2,40,000; Non-current investments ₹1,50,000 → ₹2,10,000; Machinery (net) ₹6,00,000 → ₹7,20,000. Additional information: land costing ₹60,000 was sold for ₹75,000; investments costing ₹40,000 were sold for ₹34,000; depreciation on machinery for the year was ₹80,000 and no machinery was sold; interest received on investments ₹18,000 and dividend received ₹9,000.
Workings. Land: 3,00,000 – 60,000 = ₹2,40,000, which is exactly the closing figure, so no land was purchased. Profit on sale of land = 75,000 – 60,000 = ₹15,000 (deduct in operating).
Investments purchased = 2,10,000 – 1,50,000 + 40,000 = ₹1,00,000. Loss on sale = 40,000 – 34,000 = ₹6,000 (add back in operating).
Machinery purchased = 7,20,000 – 6,00,000 + 80,000 = ₹2,00,000.
B. Cash Flow from Investing Activities
Proceeds from sale of land … ₹75,000
Proceeds from sale of investments … ₹34,000
Interest received … ₹18,000
Dividend received … ₹9,000
Purchase of non-current investments … (₹1,00,000)
Purchase of machinery … (₹2,00,000)
Net cash used in investing activities = (₹1,64,000)
Why it works: the land account proved that no purchase happened — a useful habit, because a question that gives you a falling asset balance is often testing whether you will invent a purchase that does not exist. Always reconstruct the account before you write a figure down.
Financing Activities in Practice
Section C. This is the shortest section to write and the easiest to score in, because the items come straight off the top half of the balance sheet: share capital, securities premium, long-term borrowings, short-term borrowings, and the payments made to the people who provide that money.
| Item | Inflow or outflow | Watch out for |
|---|---|---|
| Issue of equity or preference shares | Inflow | A bonus issue brings in no cash — ignore it |
| Securities premium received | Inflow | Add it to the share capital inflow, or show it separately |
| Issue of debentures / long-term loan raised | Inflow | Debentures issued to a vendor for an asset bring in no cash |
| Redemption of debentures / loan repaid | Outflow | Premium on redemption, if paid, adds to the outflow |
| Interest paid on debentures and loans | Outflow | Compute it on the balance outstanding through the year |
| Interim dividend paid | Outflow | Also add it back when computing profit before tax |
| Final dividend of last year paid this year | Outflow | Same — add it back when computing profit before tax |
| Bank overdraft / cash credit movement | Increase = inflow, decrease = outflow | Never a working capital item |
Anokhi Ltd reports (opening → closing): Equity Share Capital ₹5,00,000 → ₹6,50,000; Securities Premium ₹40,000 → ₹85,000; 12% Debentures ₹3,00,000 → ₹2,00,000; Bank overdraft ₹70,000 → ₹45,000. The debentures were redeemed at par on 1 April 2025 (the first day of the year). Interim dividend of ₹35,000 was paid, and the final dividend of ₹60,000 for the previous year was also paid during the year.
C. Cash Flow from Financing Activities
Proceeds from issue of shares (1,50,000 + 45,000 premium) … ₹1,95,000
Redemption of 12% Debentures … (₹1,00,000)
Interest on debentures paid (12% of ₹2,00,000 outstanding all year) … (₹24,000)
Interim dividend paid … (₹35,000)
Final dividend paid … (₹60,000)
Decrease in bank overdraft (70,000 – 45,000) … (₹25,000)
Net cash used in financing activities = (₹49,000)
Why it works: notice the interest calculation. Because ₹1,00,000 of debentures went on the very first day, only ₹2,00,000 was outstanding for the whole year, so interest is 12% × ₹2,00,000 = ₹24,000, not 12% × ₹3,00,000. Had the redemption happened on the last day, the full ₹3,00,000 would have carried interest for the year and the figure would have been ₹36,000. Read the date, then compute.
Putting It Together — Full Format and a Complete Board-Style Question
Now we assemble everything. Below is the complete format as prescribed under AS 3 (Revised), indirect method. Copy it out by hand three or four times — not to memorise the words, but so that your pen learns the order. In the exam you should be able to write the skeleton before you have even read the numbers.
| Cash Flow Statement for the year ended 31 March 2026 (Indirect Method) | ₹ | ₹ |
|---|---|---|
| A. Cash Flow from Operating Activities | ||
| Net Profit before Tax and Extraordinary Items | xxx | |
| Adjustments for non-cash and non-operating items: | ||
| Add: Depreciation and amortisation | xxx | |
| Add: Goodwill / preliminary expenses written off | xxx | |
| Add: Interest on debentures and long-term loans | xxx | |
| Add: Loss on sale of fixed assets / investments | xxx | |
| Less: Profit on sale of fixed assets / investments | (xxx) | |
| Less: Interest and dividend received | (xxx) | xxx |
| Operating Profit before Working Capital Changes | xxx | |
| Add: Decrease in current assets / Increase in current liabilities | xxx | |
| Less: Increase in current assets / Decrease in current liabilities | (xxx) | xxx |
| Cash Generated from Operations | xxx | |
| Less: Income tax paid | (xxx) | |
| Net Cash from (used in) Operating Activities — A | xxx | |
| B. Cash Flow from Investing Activities | ||
| Purchase of fixed assets / non-current investments | (xxx) | |
| Proceeds from sale of fixed assets / non-current investments | xxx | |
| Interest and dividend received | xxx | |
| Net Cash from (used in) Investing Activities — B | xxx | |
| C. Cash Flow from Financing Activities | ||
| Proceeds from issue of shares and securities premium | xxx | |
| Proceeds from issue of debentures / long-term borrowings | xxx | |
| Redemption of debentures / repayment of loans | (xxx) | |
| Increase (decrease) in bank overdraft / cash credit | xxx | |
| Interest paid | (xxx) | |
| Interim and final dividend paid | (xxx) | |
| Net Cash from (used in) Financing Activities — C | xxx | |
| Net Increase (Decrease) in Cash and Cash Equivalents (A + B + C) | xxx | |
| Add: Cash and Cash Equivalents at the beginning of the year | xxx | |
| Cash and Cash Equivalents at the end of the year | xxx | |
From the following Balance Sheet of Sunrise Ltd, prepare a Cash Flow Statement for the year ended 31 March 2026.
| Particulars | 31.3.2026 (₹) | 31.3.2025 (₹) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders’ Funds — (a) Share Capital | 4,00,000 | 3,00,000 |
| (b) Reserves and Surplus (Note 1) | 1,55,000 | 95,000 |
| 2. Non-Current Liabilities — 10% Debentures | 1,50,000 | 2,00,000 |
| 3. Current Liabilities — (a) Short-term Borrowings (Bank Overdraft) | 30,000 | 50,000 |
| (b) Trade Payables | 1,80,000 | 1,40,000 |
| (c) Short-term Provisions (Provision for Tax) | 40,000 | 30,000 |
| Total | 9,55,000 | 8,15,000 |
| II. ASSETS | ||
| 1. Non-Current Assets — (a) Machinery (net of depreciation) | 5,60,000 | 5,45,000 |
| (b) Non-Current Investments | 1,00,000 | 60,000 |
| 2. Current Assets — (a) Current Investments | 20,000 | 10,000 |
| (b) Inventories | 90,000 | 70,000 |
| (c) Trade Receivables | 1,30,000 | 1,00,000 |
| (d) Cash and Cash Equivalents | 55,000 | 30,000 |
| Total | 9,55,000 | 8,15,000 |
Note 1 — Reserves and Surplus: Securities Premium ₹30,000 (2025: ₹10,000); Surplus, i.e. Balance in Statement of Profit and Loss ₹1,25,000 (2025: ₹85,000).
Additional information:
(i) Depreciation charged on machinery during the year was ₹65,000.
(ii) A machine costing ₹1,20,000, whose book value was ₹70,000, was sold for ₹58,000.
(iii) Non-current investments costing ₹20,000 were sold for ₹26,000.
(iv) The 10% Debentures were redeemed at par on 31 March 2026.
(v) Provision for tax made during the year was ₹45,000.
(vi) An interim dividend of ₹15,000 was paid during the year, and the final dividend of ₹25,000 for the year ended 31 March 2025 was also paid during the year.
WORKING NOTES — do these first, always
W1. Net Profit before Tax. Closing Surplus 1,25,000 – Opening Surplus 85,000 = 40,000. Add interim dividend 15,000 and final dividend 25,000 → Net profit after tax = ₹80,000. Add provision for tax 45,000 → Net profit before tax = ₹1,25,000.
W2. Machinery. Opening 5,45,000 + Purchases – Depreciation 65,000 – Book value sold 70,000 = Closing 5,60,000 → Purchases = ₹1,50,000. Loss on sale = 70,000 – 58,000 = ₹12,000.
W3. Non-current investments. Opening 60,000 – Cost sold 20,000 + Purchases = Closing 1,00,000 → Purchases = ₹60,000. Profit on sale = 26,000 – 20,000 = ₹6,000.
W4. Tax paid. Opening 30,000 + Provision made 45,000 – Closing 40,000 = ₹35,000.
W5. Interest on debentures. The debentures were redeemed on the last day of the year, so ₹2,00,000 was outstanding throughout: 10% × 2,00,000 = ₹20,000.
W6. Shares. Share capital rose ₹1,00,000 and securities premium rose ₹20,000 → cash from issue of shares = ₹1,20,000.
W7. Cash and cash equivalents. Current investments are marketable securities, so they join the cash basket. Opening = 30,000 + 10,000 = ₹40,000. Closing = 55,000 + 20,000 = ₹75,000.
THE STATEMENT
A. Operating Activities
Net profit before tax … ₹1,25,000
Add: Depreciation ₹65,000; Loss on sale of machinery ₹12,000; Interest on debentures ₹20,000
Less: Profit on sale of investments (₹6,000)
Operating profit before working capital changes = ₹2,16,000
Add: Increase in trade payables ₹40,000
Less: Increase in inventories (₹20,000); Increase in trade receivables (₹30,000)
Cash generated from operations = ₹2,06,000
Less: Income tax paid (₹35,000)
Net cash from operating activities (A) = ₹1,71,000
B. Investing Activities
Purchase of machinery (₹1,50,000)
Proceeds from sale of machinery ₹58,000
Purchase of non-current investments (₹60,000)
Proceeds from sale of investments ₹26,000
Net cash used in investing activities (B) = (₹1,26,000)
C. Financing Activities
Proceeds from issue of shares including premium ₹1,20,000
Redemption of 10% Debentures (₹50,000)
Interest on debentures paid (₹20,000)
Interim dividend paid (₹15,000)
Final dividend paid (₹25,000)
Decrease in bank overdraft (₹20,000)
Net cash used in financing activities (C) = (₹10,000)
Net increase in cash and cash equivalents (A + B + C) = 1,71,000 – 1,26,000 – 10,000 = ₹35,000
Add: Cash and cash equivalents at the beginning … ₹40,000
Cash and cash equivalents at the end = ₹75,000 — which is exactly 55,000 + 20,000 from the balance sheet. The statement ties out.
Why it works: every figure in the statement came from a working note, and every working note came from one account. That is the whole discipline. Notice too that the current investments never appeared in investing activities — they moved from ₹10,000 to ₹20,000 inside the cash basket, which is why the closing cash figure is ₹75,000 and not ₹55,000.
Benefits, Uses and Limitations of the Cash Flow Statement
The last stretch, and it is pure theory — which means it is pure marks if you learn it properly. Questions here are usually one or three marks, and they are asked almost every year.
Benefits and uses.
- It shows liquidity and solvency clearly. A lender or supplier can see whether the company generates enough cash from its own trading to meet its obligations, or whether it survives by borrowing.
- It explains the gap between profit and cash. Two companies with identical profits can be in completely different health, and only this statement shows it.
- It helps in planning and budgeting. Management can see when cash tends to run short and arrange finance in advance.
- It helps check earlier estimates. Comparing the actual statement with the projected one shows how good the company’s forecasting is.
- It is harder to dress up. Profit depends on estimates such as depreciation methods and provisions; the movement in the bank balance is much more objective.
- It makes companies comparable. Because it strips out accounting policy differences, cash generated from operations is a fairer basis for comparing two firms — which is exactly why it is read alongside the liquidity and solvency ratios in Accounting Ratios.
- It reveals where growth is being funded from. Whether new machinery came out of operating cash or out of fresh borrowing is a very different story for a shareholder.
Limitations.
- It is historical. It reports what has already happened; it does not by itself predict the future.
- It ignores non-cash transactions. Buying a building by issuing debentures is a major event, but it does not appear in the statement at all.
- It is not a substitute for the Statement of Profit and Loss. Cash generated is not the same as profitability, and a company can raise cash simply by selling its assets.
- It can be window-dressed. Delaying payments to suppliers until just after the year end makes closing cash look better without anything really improving.
- It ignores the accrual concept. By focusing only on cash, it says nothing about liabilities that have been incurred but not yet paid.
- It must be read with the other statements. On its own, a large closing cash balance could mean a healthy business or an idle one that is failing to invest.
Two companies both report a net increase in cash of ₹30,000 for the year.
Company X: Operating ₹6,20,000; Investing (₹8,40,000); Financing ₹2,50,000. Total = 6,20,000 – 8,40,000 + 2,50,000 = ₹30,000.
Company Y: Operating (₹1,10,000); Investing ₹3,40,000; Financing (₹2,00,000). Total = –1,10,000 + 3,40,000 – 2,00,000 = ₹30,000.
Reading them. Company X is earning strong cash from its own trading, spending heavily on new assets and topping up with fresh funds — a classic growing business. Company Y is losing cash on its trading and is staying afloat by selling assets while repaying its lenders — a serious warning sign, because you can only sell your assets once.
Why it works: this is exactly the kind of comparison the board likes to set for three marks. The instruction “comment on the cash position” is really asking you to look at the sign of the operating figure first, and then at what is funding the investing.
Practice Worksheet
Ten questions, mixed marks, exactly in the style you will meet in the paper. Please do them on paper with the answers covered. Attempt every question fully, even the ones you feel shaky about — finishing a wrong statement teaches you more than abandoning a right one halfway. Then reveal the answer and compare line by line, not just the final figure.
Q1. (1 mark) Sunil Ltd is a garment manufacturer. Under which activity will it show the interest paid on its long-term bank loan?
Show Answer
Financing Activity. For a non-financial company, interest paid is the cost of a borrowing, so it belongs to financing activities. It is also added back while computing operating profit, because it was charged against profit but is not an operating expense.
Q2. (1 mark) While preparing a Cash Flow Statement, how is an increase in bank overdraft treated?
Show Answer
Bank overdraft is treated as a short-term borrowing. An increase in bank overdraft is therefore an inflow under Financing Activities. It is never included in the working capital adjustments and is never deducted from cash and cash equivalents.
Q3. (1 mark) State whether cheques and drafts in hand form part of cash and cash equivalents, and why.
Show Answer
Yes. Cheques and drafts in hand are treated as part of cash, because they represent amounts already received that can be converted into bank balance immediately and with no risk of a change in value.
Q4. (3 marks) Compute the tax paid during the year. Provision for Tax: opening balance ₹48,000, closing balance ₹62,000. Provision for tax made during the year was ₹75,000. Also state how each figure is used in the statement.
Show Answer
Provision for Tax Account: Opening ₹48,000 + Provision made ₹75,000 – Closing ₹62,000 = Tax paid ₹61,000.
Use in the statement: the ₹75,000 provision made is added to net profit after tax to arrive at net profit before tax at the top of the operating section. The ₹61,000 actually paid is deducted from cash generated from operations at the bottom of the operating section.
Q5. (3 marks) Machinery (net of depreciation) was ₹4,80,000 on 1 April 2025 and ₹5,60,000 on 31 March 2026. Depreciation charged during the year was ₹70,000. A machine with a book value of ₹40,000 was sold for ₹34,000. Compute cash flow from investing activities.
Show Answer
Machinery purchased = Closing 5,60,000 – Opening 4,80,000 + Depreciation 70,000 + Book value of machine sold 40,000 = ₹1,90,000.
Loss on sale = 40,000 – 34,000 = ₹6,000 (added back in the operating section, not shown in investing).
B. Cash Flow from Investing Activities
Purchase of machinery … (₹1,90,000)
Proceeds from sale of machinery … ₹34,000
Net cash used in investing activities = (₹1,56,000)
Q6. (4 marks) From the following, compute Net Cash from Operating Activities of Harsh Ltd for the year ended 31 March 2026. Surplus (Statement of P&L): opening ₹90,000, closing ₹1,50,000. Transfer to General Reserve ₹25,000. Interim dividend paid ₹20,000. Provision for tax made during the year ₹60,000; tax paid ₹52,000. Depreciation ₹45,000; goodwill written off ₹12,000; profit on sale of investments ₹8,000; interest on debentures ₹18,000. Inventories increased by ₹30,000; trade receivables decreased by ₹14,000; trade payables increased by ₹26,000.
Show Answer
Working — Net Profit before Tax: 1,50,000 – 90,000 + 25,000 (general reserve) + 20,000 (interim dividend) = ₹1,05,000 net profit after tax. Add provision for tax ₹60,000 → Net profit before tax = ₹1,65,000.
A. Cash Flow from Operating Activities
Net profit before tax … ₹1,65,000
Add: Depreciation ₹45,000
Add: Goodwill written off ₹12,000
Add: Interest on debentures ₹18,000
Less: Profit on sale of investments (₹8,000)
Operating profit before working capital changes = ₹2,32,000
Less: Increase in inventories (₹30,000)
Add: Decrease in trade receivables ₹14,000
Add: Increase in trade payables ₹26,000
Cash generated from operations = ₹2,42,000
Less: Income tax paid (₹52,000)
Net cash from operating activities = ₹1,90,000
Q7. (4 marks) Compute Net Cash from Financing Activities. Equity Share Capital: ₹4,00,000 → ₹5,00,000. Securities Premium: ₹20,000 → ₹45,000. 10% Debentures: ₹2,50,000 → ₹1,50,000, redeemed at par on 31 March 2026. Bank overdraft: ₹35,000 → ₹50,000. Dividend paid during the year ₹40,000.
Show Answer
Interest working: the debentures were redeemed on the last day of the year, so ₹2,50,000 was outstanding throughout. Interest = 10% × ₹2,50,000 = ₹25,000.
C. Cash Flow from Financing Activities
Proceeds from issue of shares (1,00,000 + 25,000 premium) … ₹1,25,000
Redemption of 10% Debentures … (₹1,00,000)
Interest on debentures paid … (₹25,000)
Dividend paid … (₹40,000)
Increase in bank overdraft … ₹15,000
Net cash used in financing activities = (₹25,000)
Q8. (3 marks) From the following balances of Rehmat Ltd as at 31 March 2026, compute cash and cash equivalents and state which items you excluded and why. Cash in hand ₹15,000; balance with bank ₹92,000; cheques in hand ₹6,000; short-term deposits with an original maturity of 3 months ₹55,000; current investments ₹30,000; long-term deposit maturing in 18 months ₹2,00,000; bank overdraft ₹45,000.
Show Answer
Cash and cash equivalents = 15,000 + 92,000 + 6,000 + 55,000 + 30,000 = ₹1,98,000.
Excluded: (i) the long-term deposit of ₹2,00,000, because its original maturity is more than three months — it is a non-current item shown under investing activities; (ii) the bank overdraft of ₹45,000, because in our syllabus it is a short-term borrowing whose movement is shown under financing activities, so it is not netted off cash.
Note that current investments of ₹30,000 are included, since current investments are taken as marketable securities and therefore as cash equivalents.
Q9. (6 marks) From the following Balance Sheet of Meera Ltd, prepare a Cash Flow Statement for the year ended 31 March 2026.
| Particulars | 31.3.2026 (₹) | 31.3.2025 (₹) |
|---|---|---|
| Equity Share Capital | 5,00,000 | 4,00,000 |
| Reserves and Surplus (Surplus in Statement of P&L) | 1,60,000 | 1,10,000 |
| 8% Debentures | 1,00,000 | 1,50,000 |
| Short-term Borrowings (Bank Overdraft) | 25,000 | 15,000 |
| Trade Payables | 95,000 | 80,000 |
| Short-term Provisions (Provision for Tax) | 38,000 | 32,000 |
| Total | 9,18,000 | 7,87,000 |
| Machinery (net of depreciation) | 5,40,000 | 4,60,000 |
| Non-Current Investments | 80,000 | 90,000 |
| Current Investments | 18,000 | 12,000 |
| Inventories | 1,05,000 | 85,000 |
| Trade Receivables | 1,20,000 | 95,000 |
| Cash and Cash Equivalents | 55,000 | 45,000 |
| Total | 9,18,000 | 7,87,000 |
Additional information: (i) Depreciation charged on machinery ₹55,000; a machine with a book value of ₹30,000 was sold for ₹22,000. (ii) Non-current investments costing ₹25,000 were sold for ₹31,000. (iii) The 8% Debentures were redeemed at par on 31 March 2026. (iv) Provision for tax made during the year ₹42,000. (v) An interim dividend of ₹18,000 was paid.
Show Answer
Working Notes.
W1. Net profit after tax = 1,60,000 – 1,10,000 + 18,000 (interim dividend) = ₹68,000. Net profit before tax = 68,000 + 42,000 = ₹1,10,000.
W2. Machinery purchased = 5,40,000 – 4,60,000 + 55,000 + 30,000 = ₹1,65,000. Loss on sale = 30,000 – 22,000 = ₹8,000.
W3. Investments purchased = 80,000 – 90,000 + 25,000 = ₹15,000. Profit on sale = 31,000 – 25,000 = ₹6,000.
W4. Tax paid = 32,000 + 42,000 – 38,000 = ₹36,000.
W5. Interest on debentures (redeemed on the last day, so ₹1,50,000 outstanding all year) = 8% × 1,50,000 = ₹12,000.
W6. Cash and cash equivalents: opening = 45,000 + 12,000 = ₹57,000; closing = 55,000 + 18,000 = ₹73,000.
A. Operating Activities
Net profit before tax ₹1,10,000
Add: Depreciation ₹55,000; Loss on sale of machinery ₹8,000; Interest on debentures ₹12,000
Less: Profit on sale of investments (₹6,000)
Operating profit before working capital changes = ₹1,79,000
Add: Increase in trade payables ₹15,000
Less: Increase in inventories (₹20,000); Increase in trade receivables (₹25,000)
Cash generated from operations = ₹1,49,000
Less: Income tax paid (₹36,000)
Net cash from operating activities = ₹1,13,000
B. Investing Activities
Purchase of machinery (₹1,65,000); Sale of machinery ₹22,000; Purchase of investments (₹15,000); Sale of investments ₹31,000
Net cash used in investing activities = (₹1,27,000)
C. Financing Activities
Issue of equity shares ₹1,00,000; Redemption of 8% Debentures (₹50,000); Interest on debentures paid (₹12,000); Interim dividend paid (₹18,000); Increase in bank overdraft ₹10,000
Net cash from financing activities = ₹30,000
Net increase in cash and cash equivalents = 1,13,000 – 1,27,000 + 30,000 = ₹16,000
Add: Opening cash and cash equivalents ₹57,000 → Closing = ₹73,000, which matches 55,000 + 18,000. The statement ties out.
Q10. (6 marks) From the following Balance Sheet of Tarun Ltd, prepare a Cash Flow Statement for the year ended 31 March 2026.
| Particulars | 31.3.2026 (₹) | 31.3.2025 (₹) |
|---|---|---|
| Equity Share Capital | 3,00,000 | 2,50,000 |
| Reserves and Surplus (Surplus in Statement of P&L) | 1,20,000 | 70,000 |
| 9% Debentures | 80,000 | 1,20,000 |
| Trade Payables | 60,000 | 48,000 |
| Short-term Provisions (Provision for Tax) | 26,000 | 20,000 |
| Total | 5,86,000 | 5,08,000 |
| Plant and Machinery (net of depreciation) | 3,60,000 | 3,10,000 |
| Non-Current Investments | 50,000 | 50,000 |
| Inventories | 72,000 | 60,000 |
| Trade Receivables | 66,000 | 74,000 |
| Cash and Cash Equivalents | 38,000 | 14,000 |
| Total | 5,86,000 | 5,08,000 |
Additional information: (i) Depreciation on plant and machinery for the year was ₹40,000; no plant was sold. (ii) The 9% Debentures were redeemed at par on 1 April 2025. (iii) Provision for tax made during the year was ₹30,000. (iv) No dividend was paid during the year.
Show Answer
Working Notes.
W1. Net profit after tax = 1,20,000 – 70,000 = ₹50,000 (no dividend, no transfer to reserve). Net profit before tax = 50,000 + 30,000 = ₹80,000.
W2. Plant purchased = 3,60,000 – 3,10,000 + 40,000 = ₹90,000.
W3. Tax paid = 20,000 + 30,000 – 26,000 = ₹24,000.
W4. Interest on debentures: redeemed on the first day of the year, so only ₹80,000 was outstanding throughout → 9% × 80,000 = ₹7,200.
A. Operating Activities
Net profit before tax ₹80,000
Add: Depreciation ₹40,000; Interest on debentures ₹7,200
Operating profit before working capital changes = ₹1,27,200
Add: Increase in trade payables ₹12,000; Decrease in trade receivables ₹8,000
Less: Increase in inventories (₹12,000)
Cash generated from operations = ₹1,35,200
Less: Income tax paid (₹24,000)
Net cash from operating activities = ₹1,11,200
B. Investing Activities
Purchase of plant and machinery (₹90,000)
Net cash used in investing activities = (₹90,000)
C. Financing Activities
Issue of equity shares ₹50,000; Redemption of 9% Debentures (₹40,000); Interest on debentures paid (₹7,200)
Net cash from financing activities = ₹2,800
Net increase in cash and cash equivalents = 1,11,200 – 90,000 + 2,800 = ₹24,000
Add: Opening cash and cash equivalents ₹14,000 → Closing = ₹38,000, which matches the balance sheet. The statement ties out.
Do not try to be perfect today. Kaizen means small, steady improvement, and it is the only thing that actually works in Accountancy. So set yourself the smallest possible target: get one more question right tomorrow than you got right today. One extra correct working note. One extra statement that ties out. One adjustment you no longer have to think twice about.
Do that for two weeks and you will not recognise your own answer sheet. Now go and write the four rungs of the ladder from memory. You already know them — you just have not proved it to yourself yet.