Notes And Questions NCERT Class 12 Accountancy Chapter 6 Cash Flow Statement

Please refer to Cash Flow Statement Class 12 Accountancy notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Accountancy books for Class 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.

Class 12 Accountancy Cash Flow Statement Notes and Questions

Cash Flow Statement
A cash flow statement is the financial statement that measures the cash generated or used by a company in a given period. A cash flow statement provides information about the historical changes in cash and cash equivalent so fan enterprise by classifying cash flows into operating, investing and financing activities. A Cash-Flow statement may be defined as a summary of receipts and disbursements of cash fora particular period of time.

Benefits of Cash Flow Statement
⮚ It enables to assess the financial structure of an organization.
⮚ It helps in assessing the ability of the enterprise to generate cash and cash equivalents.
⮚ It also helps in fine tuning its cash inflow and cash outflow, keeping in response to changing condition.
⮚ It helps in comparing inflows and out flows of cash.
Cash from Operating Activities
Cash flows from operating activities are primarily derived from the main activities of the enterprise. They generally result from the transactions and other events that enter into the determination of net profit or loss.
Cash Inflows & Outflows from operating activities

Inflow
⮚ Cash receipts from sale of goods and the rendering of services.
⮚ Cash receipts from royalties, fees, commissions and other revenues.

Outflow
⮚ Cash payments to suppliers for goods and services.
⮚ Cash payments to and on behalf of the employees.
⮚ Cash payments to an insurance enterprise for premiums and claims, annuities, and other policy benefits.
⮚ Cash payments of income taxes

Cash from Investing Activities
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc. Transactions related to long-term investment are also invest-ing activities.

Cash Inflows from Investing Activities

• Cash receipt from disposal of fixed assets including intangibles.
• Cash receipt from the repayment of advances or loans made to third parties
• ( except in case of financial enterprise).
• Cash receipt from disposal of shares, warrants or debt instruments of other enterprises except those held for trading purposes.

● Interest received in cash from loans and advances.
● Dividend received from investments in other enterprises

Cash Outflows from investing activities
⮚ Cash payments to acquire fixed assets including intangibles and capitalized research and development.
⮚ Cash payments to acquire shares, warrants or debt instruments of other enterprises other than the instru-ments those held for trading purposes.
⮚ Cash advances and loans made to third party (other than advances and loans made by a financial enterprise wherein it is operating activities).

Cash flow from financing Activities
Financing activities are activities that result in changes in the size and composition of the owners’ capital and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is im-portant because it is useful in predicting claims on future cash flows by providers of funds Cash Inflows & Outflows from financing activities

Cash Inflows from Financing Activities
⮚ Cash proceeds from issuing shares (equity or/and preference).
⮚ Cash proceeds from issuing debentures, loans, bonds and other long term borrowings.
Cash Outflows in Financing Activities
⮚ Cash repayments of amounts borrowed.
⮚ Repayment and redemption of share capital.
⮚ Interest paid on debentures and long-term loans and advances.
⮚ Dividends paid on equity and preference capital.

Objectives of Cash Flow Statement
1. To ascertain how much cash or cash equivalents have been generated or use in different activities i.e., operating / investing / financing activity.
2. To ascertain the net changes in cash and cash equivalents.
3. To assess the causes of difference between actual cash& cash equivalent and related net earn-ings/income.
4. To help in formulation of financial policies such as dividend policy, fixed assets policy, capital structure related policy.
5. To help in short-term financial planning.
6. To ascertain the liquid it yof enterprises

Important Points to Remember:
1. Firstdecide the nature of enterprise it is financial or Non-Financial.
2. For Calculating depreciation, check the Balance Sheet to find out thatvalues of assets are given at net value (i.e., written down value) or atGross Block (Shown Accumulated dep. A/c also). There after attemptquestion accordingto the instructions.
3. CurrentInvestmentormarketablesecuritiesisapartofCashandCash equivalent as per As-3 (revised.) if both are given separately thanmarketable securities will be considered as cash equivalent and re-mainingcurrentInvestment will consider in Investing activities.
4. Bank overdraft and cash credit will be considered in financial activity notunderworking capital changes in operating activities.

I. Computation of Cash flows from operating activities.
Operating activities are the main revenue generating activities of the enterprises. It also includes all thosetransactionswhich are not included in investing and financing activities.
(A) Calculation of Net Profit before Tax and Extra-ordinary Items:

(B) For the calculation of provision for Taxation made during the current year, the Provision for Taxation A/c is to be prepared as follows

II.Calculation of Cash Flow from Investing Activities
Investing activities are those activities which are related to the acquisition (buying) and disposal (selling) of fixed assets and investment (other than cash equivalents). It also includes income from fixed assets and investment like rent received, interest received on investment, dividend received on investment in shares and mutualfunds.

For the calculation of sale or purchase of fixed assets , Fixed assets accounts may be prepared

When provision for depreciation account or accumulated depreciation account has been separately main-tained, the following account is prepared to calculate the depreciation charged to Asset account.

III. Calculation of Cash Flow from FinancingActivities
Financing activities are those activities that result in the change in size andcomposition of the share capital (equity and preference) and borrowed fund of thebusiness enterprises. Generally cost related to these funds are also included in financing activities like interest paid on loans and debentures and dividend paid on equity and preference share capital.

Financing Business Enterprise Transaction Treatment in Cash Flow Statement
Financing business enterprises are the business enterprises which deal in finance like investment companies, mutual fund house and banks. These enterprises purchases and sale , securities as their stock, so it is treated as operating activities and interest received, dividend received and interest paidare considered as routine business activities and included in their operating activities.

Very short Answer Type (Including CBSE modified questions)

Question. From the following particulars, what will be the amount of provision for tax made during the year?
Provision for Taxation
31.3.2018 – 50,000
31.3.2019 – 40,000
The Company paid taxes Rs 45,000 for the year 2018-2019.
(a) Rs 45,000
(b) Rs 35,000
(c) Rs 40,000
(d) Rs 50,000

Question. From the following information, the outflow of cash for the purchase of machinery will be:
Written down value of machinery as on 1.4.2018 – Rs 5,00,000
Written down value of machinery as on 31.3.2019 -Rs7,00,000
Depreciation on machinery charged during the year Rs 60,000
Machinery having book value Rs 25,000 sold for Rs 20,000
(a) Rs 2,70,000
(b) Rs 2,80,000
(c) Rs 2,75,000
(d) Rs 2,85,000

Question. Which of the following transactions would result inflow of cash:
(a) Cash withdrawn from Bank for office use.
(b) Purchase of machinery worth Rs 2,00,000 and issued shares in consideration thereof.
(c) Sale of furniture for Rs 3,000 to Mr. Mohan.
(d) Cash received from Debtors Rs 6,000

Question. Which of the following transactions would not create a cash flow?
(a) A company purchased some of its own stock from a stockholder
(b) Amortization of a patent
(c) Payment of a Cash Dividend
(d) Sale of equipment at book value

Question. Declaration of Final Dividend would result in ___
(a) Outflow in Financing activities.
(b) Outflow in Operating activities.
(c) Inflow in Operating activities.
(d) No Flow of cash.

Question. For a company manufacturing garments, procurement of raw material, incurrence of manufacturing expenses, sale of garments are classified as ………………………
(a) Financing Activity
(b) Investing Activity
(c) Operating Activity
(d) None of these

Question. Issue of share for consideration other than cash will result into cash
(a) Inflow
(b) Outflow
(c) No flow
(d) None of these

Question. Interest received in cash on loans and advances results in cash inflow from ………… activity
(a) Financing
(b) Investing
(c) Operating
(d) None of the above

Question. How is ‘dividend paid’ by a financial enterprise treated while preparing Cash Flow Statement?
Answer.Dividend paid is treated as Financing Activity

Question. Under which type of activity will you classify ‘Cash advances and loans made to third party’ while preparing Cash Flow Statement?
Answer.Investing Activity

Question. Give the meaning of ‘Cash’ for the purpose of preparing Cash Flow Statement.
Answer.Cash comprises of Cash in hand and demand deposits with banks

Question. What is meant by Cash Equivalents?
Answer.Cash Equivalents are short-term,highly liquid investments that are readily convertible into known amount of cash.

Question. X Ltd. Redeemed Rs.1,00,000, 9% debentures at 10% premium. What will be the amount of ‘Cash flows from financing activities?
Answer.Cash Outflow in Financing Activity will be Rs.1,10,000 where
Debenture redeemed = Rs.1,00,000
Premium on Redemption = Rs.10,000(10% of Rs.1,00,000)

Question. Which of the following statements is/are correct?
(a) Dividend paid is always shown as operating activity.
(b)Depreciation and amortization, being non-cash expenses, are deducted from net profit before tax and extraordinary items.Alternatives
(a) Only (a)
(b) Only (b)
(c) Both (a) and (b)
(d) None of these

Question. Why is depreciation added back to net profit while preparing Cash Flow Statement?
Answer.Depreciation is added back because it does not result in outflow of cash but decreases the profit.

Short Answer Type (Including CBSE Modified Questions)

Question. X Ltd. Made a profit of 1,00,000 after considering thef ollowing items:
Depreciation of fixed assets-Rs 20,000
Writingoff preliminary expenses-Rs10,000
Losson sale of furniture – Rs1,000
Provision of Taxation – Rs 1,60,000
Transfer to General reserve – Rs14,000
Profiton sale of Machinery – Rs6,000
Income tax Paid- Rs 1,60,000

Calculate Cash Flow from OperatingActivities.
Answer.Calculation of Net Profit beforeTax and Extra-ordinary items

Question. From the following information calculate cash flow from investing activities:

Additional Information
1.During the year,a machine costing Rs.50,000 with its accumulated depreciation of Rs.25,000 was sold for Rs.20,000
2. Patents were written off to the extent of Rs.60,000 and some patents were sold at a profit of Rs.10,000.
3. 40% of the investments held in the beginning of the year were sold at10% Profit.
4. Interest received on investment Rs.25,500.
5. Dividend received on investment Rs.8,500.
6. Rentr eceivedRs.5,000.
Answer.Cash Flow from Investing Activities

Question. From the following information ,calculate the net cash flow from financing Activities

Additional Information
a) Interest paid on DebenturesRs.12,500
b) During the year2020-2021,company issued bonus shares to equity shareholders in the ratio of 2:1 by capitalizing reserve.
c) The interim dividend of Rs.75,000 has been paid during the year.
d) 9%Debentures were redeemed as 5% premium.
e) Proposed equity dividend for the years ended 31/3/2020 and 31/3/2021 ended Rs.3,00,000 and Rs.1,50,000 respectively.
Answer.Cash Flow from Financing Activities

Important points to be noted in this problem
1. Bonus shares worth Rs.5, 00,000 issued to equity shareholder are not to be shown in the cash flow state-ment because there is no flow of cash by this activity.
2. Previous year proposed dividend-unpaid dividend =final dividend paid during the current year, is cash used in financing activities.

Question. From the following information calculate the Net profit before tax and Extraordinary Items
Statement of Profit and Loss as on 31.03.2021-Rs.1,00,000
Statement of Profit and Loss as on 31.03.2020-Rs.25,000
Proposed Dividend as on 31.03.2021- Rs.75000
Proposed Dividend as on 31.03.2020- Rs.50000
Provision for Tax as on 31.03.2021 – Rs.125000
Provision for Tax as on 31.03.2020 – Rs.75000
Answer.Calculation of Net profit before tax and Extra ordinary items

Question. From the information given below, calculate the amount of cash flow from investing activities

Additional information:
A machinery of the book value of Rs.90,000(Depreciation provided thereon was Rs.23,000), was sold at a profit of Rs.12,000
Answer.Plant and Machinery account

Question. How the various activities are classified (as per AS-3 revised)while preparing the cash flow state-ment?
Answer.Cash from Operating Activities
Cash flows from operating activities are primarily derived from the main activities of the enterprise. They generally result from the transactions and other events that enter into the determination of net profit or loss.
Cash from Investing Activities
Investing activities are the acquisition and disposal of long-term assets and other investments not in-cluded in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc. Transactions related to long-term investment are also investing activities.
Cash flow from financing Activities
Financing activities are activities that result in changes in the size and composition of the owners’ capi-tal and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds

Question. Following Extracted information of V Ltd. is available on 31st March 2022:

Additional information:
a) Bank overdraft was availed on 1st December 2021. Interest on Bank Overdraft was paid on 31st March 2022.
Find out Cash Flow from Financing Activities.
Answer.

Question. State any two objectives of preparing ‘Cash flow statement’
Answer.Objectives of Cash Flow Statement:
(i) To provide information of cash inflow and outflow from Operating/Investing/ Financing Activities.
(ii) To determine net change in Cash and Cash Equivalents.

Question. From the following information, calculate cash flow from investing and financing activities.

In year 2022, machine costing Rs.2,00,000 was sold at a profit of Rs.1,50,000, depreciation charged on machine during the year 2022 amounted to Rs.2,50,000.
Answer.

Question. Under Which type of activity will you classify the following while preparing cash flow statement?
1) Dividend paid by manufacturing company
2) Dividend paid by a finance company.
3) Interest paid by an Investment company.
4) Payment of interest on loan by manufacturing company.
5) Cash receipt from sale of goods by a trading company.
6) Rent received on property held as investment.
7) Interest paid on long term borrowing.
8) Dividend received by a finance company.
9) Proceeds from sale of investment.
10) Refund of Income Tax received.
Answer.
1) Financing Activity
2) Financing Activity
3) Operating Activity
4) Financing Activity
5) Operating Activity
6) Investing Activity
7) Financing Activity
8) Operating Activity
9) Investing Activity
10) Operating Activity

Long Answer Type Questions

Question. From the following Balance Sheets of X Ltd. as on31.03.2020and 31.03.2021.
Prepare a cash flow statement.Balance Sheet as at 31st March, 2020 and 2021

Notes to Accounts:

Additional Information: (i) Depreciation on fixed assets for the year2020-21 wasRs.14,700.
(ii) An interim dividend Rs.7,000 has been paid to the shareholders during the year.
Answer.

Question. Prepare a cash Statement on the basis of the information given in the Balance Sheets of L Ltd. as at 31.3.2021 and 31.3.2020:

Notes to Accounts:
Note No:1

Answer. Cash Flow Statement of L Ltd For the year ended 31st March 2021

Question. Following are the Balance sheet of K Ltd. For the year ended31stMarch 2020 and 2019.

Prepare a cash flow statement after considering the following adjustments:
(a) Interest paid on long term borrowing Rs.36,000
(b) Depreciation on Tangible assets during the year Rs.1,20,000.
Answer.Cash flow statement

Question. Prepare Cash Flow Statement from the following Balance Sheet:

Additional information:
An old Machinery having book value of Rs.42,000 was sold for Rs.56,000. Depreciation provided on ma-chinery during the year was Rs.28,000.
Answer.Cash flow statement

Question. From the following, calculate the net cash flow from operating activities.

Additional information:
During the year, a piece of machinery costing Rs.30,000 on which depreciation charged Rs.10,000 was sold for Rs.10,000. Depreciation provided on fixed assets Rs.30,000. Dividend on equity shares @8% was paid on opening balance. Income tax Rs.22,500 was provided. Additional debentures were issued at par on 1st October, 2020 and the bank loan was repaid on the same date. At the end of the year, preference shares were redeemed at a premium of 5%
Answer.Calculation of Net Cash Flow from Operating Activities

Question. From the following, Calculate Cash Flow from Investing Activities.

Additional information:
(i) Patents were written off to the extent of Rs.40,000 and some patents were sold at a profit of Rs.20,000.
(ii) A machine costing Rs.1, 40,000(Depreciation provided thereon Rs.60, 000) was sold for Rs.50, 000. Depreciation charged during the year was Rs.1,40,000.
(iii) On March 31, 2022, 10% Investments were purchased for Rs.1,80,000 and some investments were sold at a Profit of Rs.20,000. Interest on investment was received on March 31, 2022.
(iv)A Ltd. paid dividend @10% on its shares.
(v)A plot of land was purchased out of surplus funds for investment purposes and let out for commercial use and rent received Rs.30,000
Answer.Cash Flow from Investing Activities

Question. Following are the Balance sheet of V Ltd. For the year ended 31stMarch 2021 and 2020

Prepare a cash flow statement after considering the following adjustments:
(a) Depreciation was charged at the end Rs.1,00,000 on Fixed Asset.
(b) Dividend paid during the year Rs.1,00,000.
(c) Tax provision made during the year Rs.1,20,000
Answer.Cash flow statement

Question.Following was the Balance sheet of S Ltd. For the year ended31st March 2021 and 2020.

Notes to Accounts:

Prepare a cash flow statement after considering the following adjustments:
During the year , a piece of machinery costing Rs.30,000 on which accumulated depreciation was Rs.6,000, was sold for Rs.20,000.
Answer.(i) Cash Flow from Operating Activities = Rs. 2,80,000
(ii) Cash used in Investing Activities = Rs.8,10,000
(iii)Cash Flow from Financing Activities = Rs.6,00,000
(iv)Net Increase in Cash and Cash Equivalent = Rs.70,000
Working notes:

Machinery Account

Question.From the following Balance sheet of J Ltd. For the year ended 31stMarch 2022 and 2021, prepare a cash flow statement.

Additional information
Rs.1,00,000, 10% debentures were issued on 31st March 2022.
Answer.(i) Cash Flow from Operating Activities = Rs. 1,77,500
(ii) Cash used in Investing Activities = Rs.2,12,500
(iii) Cash Flow from Financing Activities = Rs.85,000
(iv) Net Increase in Cash and Cash Equivalent = Rs.50,000
Working notes :

Question. State whether the following would result in inflow, outflow or no flow of cash while preparing cash flow statement. Give your answer with reason:
a) Charging of depreciation on furniture.
b) Issue of 9% debentures to the vendors for the purchase of machinery of Rs.50,000.
c) Declaration of final dividend
d) Sale of marketable securities at par
e) Interest paid on debentures
f) Redemption of debentures
g) Interest received on debentures
h) Purchase of Patents in cash
i) Cash paid as salaries to workers
j) Deposit of Cash into Bank
Answer.
a) No flow of cash because depreciation is not paid in cash.
b) No flow of cash because it does not affect either cash or cash equivalents.
c) No flow of cash because it is a proposed dividend which is not to be paid during current year.
d) No flow of cash because there is no change in cash as both the accounts involved in the transaction are of cash nature only
e) Out flow of cash because it decreases cash
f) Out flow of cash because it decreases cash.
g) Inflow of cash because it increases cash.
h) Outflow of cash because it decreases cash.
i) Outflow of cash because it decreases cash.
j) No flow of cash because there is no change in cash as both cash and bank components are the part of cash management.