Question

NCERT Solutions Class 12, Accountancy Part-II, Chapter- 6, Cash Flow Statement

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Concepts covered in Class 12 Accountancy Part-II Chapter- 6 Cash Flow Statement, are-

• Nature of the cash flow statement
• Benefits of cash flow statement
• Cash and cash equivalents
• Cash flows
• Preparation of cash flow statement

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Answer 1

NCERT Solutions Class 12, Accountancy Part-II, Chapter- 6, Cash Flow Statement

Short Answers

1. What is a cash flow statement?

Solution:

A financial statement that represents the inflow and outflow of cash and cash equivalents of a company is called a cash flow statement. It shows how well a company can manage its cash position and generates enough cash to pay the obligations in the form of debt and also run the operational expenses.

2. How are the various activities classified (as per AS-3 revised) while preparing the cash flow statement?

Solution:

Three types of activities are defined, and they are as follows:

1. Operating Activities

2. Financing Activities

3. Investing Activities

3. State the uses of the cash flow statement.

Solution:

The following are the uses of the cash flow statement:

i. Useful for evaluating the cash position of a firm

ii. Helpful in finding deficiencies and variations in firms’ performance which helps in effective decision making

iii. It helps in the assessment of the liquidity of a company

iv. It analyses cash receipts and payments from the various activities of a company and helps in short-term planning

v. It helps in segregating cash flows obtained from the various activities of the business

vi. It helps in providing decisions about the distribution of profit.

vii. It is useful for short-term financial analysis

4. What are the objectives of preparing a cash flow statement?

Solution:

The following are the objectives of preparing a cash flow statement:

i. To determine the inflow and outflow of cash and the cash equivalents obtained from different kinds of activities.

ii. To seek out various reasons responsible for the change in cash balances during the accounting period

iii. It helps in depicting the position of the company in terms of liquidity and solvency

iv. It also helps in determining the requirement and the corresponding availability of cash for business in future.

5. State the meaning of the terms: Cash Equivalents, Cash flows.

Solution:

Cash equivalents are investments that are highly liquid in nature and do not change value easily. Cash equivalents are essential for managing short-term cash requirements or any such investments. For example, treasury bills.

Cash Flows: It is the inflow and outflow of cash and cash equivalents. Cash inflows boost cash balance, and cash outflow has a negative impact on cash balance

6. Prepare a format of cash flow from operating activities under the indirect method.

Solution:

The format is as follows:

7. State clearly what would constitute the operating activities for each of the following enterprises:

(i) Hotel

(ii) Film production house

(iii) Financial enterprise

(iv) Media enterprise

(v) Steel manufacturing unit

(vi) Software development business unit.

Solution:

(i) Hotel

1. Receipts obtained from the sale of goods to customers

2. Customer stay, payments of wages and salaries, food items, and electricity are operating activities

(ii) Film Production House:

1. Receipts obtained from the selling of film rights to distributors

2. Payment provided to actors, actresses, directors and other employees

(iii) Financial Enterprises:

1. Receipts obtained from loan repayments and interest received from investments

2. Salary for employees, expenditure incurred for recovering loans, loan repayment etc.

(iv) Media Enterprises:

1. Receipts that are obtained from various advertisements

2. Payments made to photographers, employees and reporters

(v) Steel Manufacturing Unit:

1. Receipts obtained from the sale of steel rods, castings and sheets

2. Payments made for purchasing iron, coal and salaries to staff

(vi) Software Development Business Unit:

1. Receipts obtained for software sales and license renewal

2. Payments towards salaries of employees

8. “The nature/type of enterprise can change altogether the category into which a particular activity may be classified.” Do you agree? Illustrate your answer.

Solution:

Yes, it can happen. For example, there are two firms one is engaged in real estate and the other in general business. For the firm engaged in the real estate sale of a building will be regarded as part of the operating activity, while for the firm dealing with general business, the purchase or sale of a building is regarded as an investing activity. Therefore, it can be said that nature and type of enterprise determine the type of activities.

Answer 2

Long Answers

1. Describe the procedure to prepare a cash flow statement.

Solution:

The procedure to prepare Cash Flow Statement is described in the following steps in their chronological order.

Step 1: Ascertain the cash flows from operating activities

Step 2: Ascertain the cash flows from investing activities

Step 3: Ascertain the cash flows from financing activities

Step 4: Ascertain net increase or decrease by summing up the amounts of Steps 1, 2, and 3.

Step 5: Write the opening balance of cash and cash equivalents and deduct it from the amount ascertained in Step 4. The resulting figure arrived is the Closing Balance of Cash and Cash Equivalents.

There are two methods viz. Direct Method and Indirect Method for the preparation of Cash Flow Statement.

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.

2. Describe "Indirect" method of ascertaining Cash Flow from Operating Activities.

Solution:

Indirect Method: This method starts with the Net Profit before tax and extraordinary items. For this purpose, the Net Profit as revealed by the Profit and Loss Account cannot be taken into consideration as there exists some items which do not leads to outflow of cash. The following are those items that need to be added back to the Net Profit of the Profit and Loss Account.

1. Non-cash items like, depreciation goodwill written off, etc are added to the Net Profit.
2. Non-operating expenses like loss on sale of fixed assets, transfers to reserves, loss on sale of fixed assets are added back to the Net Profit.
3. Provisions like, provisions for doubtful debts and discount for debtors, proposed dividends etc. should be added back to the Net Profit.
4. Decrease in current assets and increase in current liabilities should be added to the operating profit.

The following are those items that need to deduct from the Net Profit of the Profit and Loss Account.

1. Non-operating incomes like profit on sale of fixed assets, etc. are deducted from the Net Profit.
2. Non-trading Incomes like dividend received, interest received, tax refund, etc. are to be deducted from the Net Profit.
3. Increase in current assets and decrease in current liabilities should be deducted from the operating profit.

3. Explain the major Cash Inflow and outflows from investing activities.

Solution:

Investing activities are those activities that are related to sales and purchases of long-term fixed assets like, land and building, plant and machinery, furniture, etc. These fixed assets are not held for resale. The activities like sale and purchase of investments that are not included in the cash equivalents are also included in Investing activities. Any income arising from such investments (assets) are regarded a part of investing activities.

As per the AS3, the major cash inflows and outflows from investing activities are as follows:

1. Cash payments to acquire fixed assets (including intangibles like, goodwill). These payments include capitalised cost of research and development and self constructed fixed assets.
2. Cash receipts from disposal of fixed assets (including intangible assets).
3. Cash payments to acquire shares, warrants, or debt instruments of other enterprises and interest in joint venture (other than payments of those instruments consider as cash equivalents and are held for the trading purposes).
4. Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interest from joint ventures (other than receipts from those held for trading purposes).
5. Cash advances and loans made to third parties (other than advances, and loans made by financial enterprises). These will be treated as cash flows from the operating activities.
6. Cash receipts from repayment of advances and loans made to third parties (other than advances and loans of financial enterprises). These will be treated as cash flows from operating activities.
7. Cash receipts from insurance company for any property involved in accident.
8. Any income arising from fixed assets or investments like interest, dividend, rent etc. In case of financial enterprises interest and dividend is treated as operating activities.

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.

4. Explain the major Cash Inflows and outflows from financing activities.

Solution:

Financing activities are those activities that are related to capital or long term funds of an enterprise. These activities results in the change in the capital and borrowed funds.

As per the AS3, the major cash inflows from financing activities are as follows:

1. Cash proceeds from issue of shares and other similar instruments.
2. Cash proceeds from issue of debentures, loans, notes, bonds, and other short and long-term borrowings.

As per the AS3, the major cash outflows from financing activities are as follows:

1. Cash repayments of the amount borrowed in form of debentures, loans, notes bonds, and other short and long-term borrowings.
2. Buy-back of shares and debentures.
3. Interest paid on debentures, loans, and advances.
4. Dividend paid to the preference shareholders and equity shareholders.

An important point that must be noted is that the purchase and sale of securities, interest paid or received and dividend received is treated as cash flow from operating activities for an investment company. But dividend paid is treated as cash flow from financing activities.

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.

Answer 3

Numerical Questions

1. Anand Ltd., arrived at a net income of Rs 5,00,000 for the year ended March 31, 2017. Depreciation for the year was Rs 2,00,000. There was a profit of Rs 50,000 on assets sold which was transferred to Statement of profit and Loss account. Trade Receivables increased during the year Rs 40,000 and Trade Payables also increased by Rs 60,000. Compute the cash flow operating activities by the indirect approach.

Solution:

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

Particulars	(Rs)
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

Solution:

Cash paid for Inventory amounts to Rs 1,59,500

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

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

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

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

Solution:

(a) Amount paid for Machinery = \(2,50,000 \times \frac{20}{100} =50,000\)

Part payment Rs 50,000 for acquiring machinery Rs 2,50,000 is related with Investing Activities

(b)

Amount paid to acquire assets and dividend received is a part of Investing Activities.

(c) Inflow of cash of Rs 60,000 on sale of machinery is a part Investing Activities.

4. The following is the Profit and Loss Account of Yamuna Limited:

Statement of Profit and Loss of Yamuna Ltd., for the Year ended March 31, 2017
Particulars		Note No.	Amount (Rs)
i)	Revenue from Operations		10,00,000
ii)	Expenses
	Cost of Materials Consumed	1	50,000
	Purchase of Stock-in-trade		5,00,000
	Other Expenses	2	3,00,000
	Total Expenses		8,50,000
iii)	Profit before Tax (i – ii)		1,50,000

Additional information:

(i) Trade receivables decrease by Rs 30,000 during the year.

(ii) Prepaid expenses increase by Rs 5,000 during the year.

(iii) Trade payables increase by Rs 15,000 during the year.

(iv) Outstanding expenses payable increased by Rs 3,000 during the year.

(v) Other expenses included depreciation of Rs 25,000. 

Compute net cash from operations for the year ended March 31, 2017 by the indirect method.

Solution:

Note: As per the solution, the Net Cash from Operating Activities is Rs 2,38,000, however, as per the answer given in the book is Rs 2,18,000.

5. Compute cash from operations from the following figures:

(i) Profit for the year 2016-17 is a sum of Rs. 10,000 after providing for depreciation of Rs. 2,000.

(ii) The current assets and current liabilities of the business for the year ended March 31, 2016 and 2015 are as follows:

Particular	March 31, 2016 (Rs)	March 31, 2017 (Rs)
Trade Receivables	14,000	15,000
Provision for Doubtful Debts	1,000	1,200
Trade Payables	13,000	15,000
Inventories	5,000	8,000
Other Current Assets	10,000	12,000
Expenses payable	1,000	1,500
Prepaid Expenses	2,000	1,000
Accrued Income	3,000	4,000
Income received in advance	2,000	1,000

Solution:

Answer 4

6. From the following particulars of Bharat Gas Limited, calculate Cash Flows from Investing Activities. Also, show the workings clearly preparing the ledger accounts:

Balance Sheet of Bharat Gas Ltd. as on 31 Mar. 2016 and 31 Mar. 2017

Particulars	Note No.	Figures as the end of 2017 (Rs)	Figures as at the end of reporting 2016 (Rs)
II) Assets
1. Non-current Assets
a) Fixed assets
i) Tangible assets	1	12,40,000	10,20,000
ii) Intangible assets	2	4,60,000	3,80,000
b) Non-current investments	3	3,60,000	2,60,000

Notes 1 tangible assets = Machinery 

2 Intangible assets = Patents

Notes

	Figures of current year	Figures of previous year
1. Tangible Assets
Machinery	12,40,000	10,20,000
2. Intangible Assets
Goodwill	3,00,000	1,00,000
Patents	1,60,000	2,80,000
	4,60,000	3,80,000
3. Non-current Investments
10% long term investments	1,60,000	60,000
Investment in land	1,00,000	1,00,000
Shares of Amartex Ltd.	1,00,000	1,00,000
	3,60,000	2,60,000

Additional Information:

(a) Patents were written-off to the extent of Rs. 40,000 and some Patents were sold at a profit of Rs. 20,000.

(b) 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.

(c) On March 31, 2016, 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, 2017.

(d) Amartax Ltd. paid Dividend @ 10% on its shares.

(e) A plot of Land had been purchased for investment purposes and let out for commercial use and rent received Rs. 30,000.

Solution:

Answer 5

7. From the following Balance Sheet of Mohan Ltd., prepare cash flow Statement:

Balance Sheet of Mohan Ltd.,
as at 31st March 2016 and 31 March 2017

Particulars	Note No.	March 31, 2017 (Rs)	March 31, 2016 (Rs)
I) Equity and Liabilities
1. Shareholders’ Funds
a) Equity share capital		3,00,000	2,00,000
b) Reserves and surplus		2,00,000	1,60,000
2. Non-current liabilities
a) Long-term borrowings	1	80,000	1,00,000
3. Current liabilities
Trade payables		1,20,000	1,40,000
Short-term provisions	2	70,000	60,000
Total		7,70,000	6,60,000
II) Assets
1. Non-current assets
Fixed assets	3	5,00,000	3,20,000
2. Current assets
a) Inventories		1,50,000	1,30,000
b) Trade receivables	4	90,000	1,20,000
c) Cash and cash equivalents	5	30,000	90,000
Total		7,70,000	6,60,000

Notes to accounts:

	2017	2016
1. Long-term borrowings
Bank Loan	80,000	1,00,000
2. Short-term provision
Proposed dividend	70,000	60,000
3. Fixed assets	6,00,000	4,00,000
Less: Accumulated Depreciation	1,00,000	80,000
(Net) Fixed Assets	5,00,000	3,20,000
4. Trade receivables
Debtors	60,000	1,00,000
Bills receivables	30,000	20,000
	90,000	1,20,000
5. Cash and cash equivalents Bank	30,000	90,000

Additional Information:

Machine Costing Rs. 80,000 on which accumulated depreciation was Rs. 50,000 was sold for Rs. 20,000.

Solution:

Answer 6

8. From the following Balance Sheets of Tiger Super Steel Ltd., prepare Cash Flow Statement:

Balance Sheet of Tiger Super Steel Ltd.
as at 31st March 2014 and 31st March 2017

Particulars	Note No.	March 31, 2017 (Rs)	March 31, 2016 (Rs)
I) Equity and Liabilities
1. Shareholders’ Funds
a) Share capital	1	1,40,000	1,20,000
b) Reserves and surplus	2	22,800	15,200
2. Current Liabilities
a) Trade payables	3	21,200	14,000
b) Other current liabilities	4	2,400	3,200
c) Short-term provisions	5	28,400	22,400
Total		2,14,800	1,74,800
II) Assets
1. Non-Current Assets
a) Fixed assets
i) Tangible assets	6	96,400	76,000
ii) Intangible assets		18,800	24,000
b) Non-current investments		14,000	4,000
2. Current Assets
a) Inventories		31,200	34,000
b) Trade receivables		43,200	30,000
c) Cash and Cash Equivalents		11,200	6,800
Total		2,14,800	1,74,800

Notes to accounts:

	2017	2016
1. Share Capital
Equity share capital	1,20,000	80,000
10% Preference share capital	20,000	40,000
	1,40,000	1,20,000
2. Reserves and surplus
General reserve	12,000	8,000
Balance in statement of profit and loss	10,800	7,200
	22,800	15,200
3. Trade payables
Bills payable	21,200	14,000
4. Other current liabilities
Outstanding expenses	2,400	3,200
5. Short-term provisions
Provision for taxation	12,800	11,200
Proposed dividend	15,600	11,200
	28,400	22,400
6. Tangible assets
Land and building	20,000	40,000
Plant	76,400	36,000
	96,400	76,000

Additional Information:

Depreciation Charge on Land & Building Rs 20,000, and Plant Rs 10,000 during the year.

Solution:

Working Notes:

Note: As per the solution, the Net Cash from Operating Activities, net Cash from Investing Activities and Net Cash from Financing Activities are Rs 56,000, Rs (60400) and Rs 8,800 respectively. However, as per the answer given in the book, the Net Cash from Operating Activities, net Cash from Investing Activities and Net Cash from Financing Activities are Rs 34,800, Rs (50,400) and Rs 20,000 respectively.

Answer 7

9. From the following information, prepare cash flow statement:

Particulars	Note No.	31st March 2015 (Rs)	31st March 2014 (Rs)
I) Equity and Liabilities
1. Shareholders’ Funds
a) Share capital		7,00,000	5,00,000
b) Reserves and surplus		4,70,000	2,50,000
2. Non-current Liabilities
(8% Debentures)		4,00,000	6,00,000
3. Current Liabilities
a) Trade payables		9,00,000	6,00,000
Total		24,70,000	19,50,000
II) Assets
1. Non-current assets
a) Fixed assets
i) Tangible		7,00,000	5,00,000
ii) Intangible-Goodwill		1,70,000	2,50,000
2. Current assets
a) Inventories		6,00,000	5,00,000
b) Trade Receivables		6,00,000	4,00,000
c) Cash and cash equivalents		4,00,000	3,00,000
Total		24,70,000	19,50,000

Additional Information:

Depreciation Charge on Plant amount to Rs. 80,000.

Solution:

Working Note:

Answer 8

10. From the following Balance Sheet of Yogeta Ltd., prepare cash flow statement:

Particulars	Note No.	31st March 2017 (Rs)	31st March 2016 (Rs)
I) Equity and Liabilities
1. Shareholders’ Funds
a) Share capital	1	4,00,000	2,00,000
b) Reserves and surplus-Surplus		2,00,000	1,00,000
2. Non-current Liabilities
a) Long-term borrowings	2	1,50,000	2,20,000
3. Current Liabilities
a) Short-term borrowings		1,00,000	-
(Bank overdraft)
b) Trade payables		70,000	50,000
c) Short-term provision		50,000	30,000
(Provision for taxation)
Total		9,70,000	6,00,000
II) Assets
1. Non-current assets
a) Fixed assets
i) Tangible		7,00,000	4,00,000
2. Current assets
a) Inventories		1,70,000	1,00,000
b) Trade Receivables		1,00,000	50,000
c) Cash and cash equivalents		-	50,000
Total		9,70,000	6,00,000

Notes to Accounts -

Particulars	31st March 2017 (Rs)	31st March 2016 (Rs)
1. Share capital
a) Equity share capital	3,00,000	2,00,000
b) Preference share capital	1,00,000	-
	4,00,000	2,00,000
2. Long term borrowings
Long-term loan	-	2,00,000
Long-term Rahul	1,50,000	20,000
	1,50,000	2,20,000

Additional Information:

Net Profit for the year after charging Rs. 50,000 as Depreciation was Rs. 1,50,000. Dividend paid on Share was Rs. 50,000, Tax Provision created during the year amounted to Rs. 60,000. 8% loan was repaid on March 31, 2017 and an additional 9% loan of Rs. 1,30,000 was obtained from Rahul on April 01, 2016.

Solution:

Working Notes:

Answer 9

11. Following is the Financial Statement of Garima Ltd., prepare cash flow statement.

Particulars	Note No.	31st March 2017 (Rs)	31st March 2016 (Rs)
I) Equity and Liabilities
1. Shareholders’ Funds
a) Share capital	1	4,40,000	2,80,000
b) Reserve and surplus-Surplus	2	40,000	28,000
2. Current Liabilities
a) Trade payables		1,56,000	56,000
c) Short-term provisions		12,000	4,000
(Provision for taxation)
Total		6,48,000	3,68,000
II) Assets
1. Non-current assets
a) Fixed assets
i) Tangible		3,64,000	2,00,000
2. Current assets
a) Inventories		1,60,000	60,000
b) Trade receivables		80,000	20,000
c) Cash and cash equivalents		28,000	80,000
d) Other current assets		16,000	8,000
Total		6,48,000	3,68,000

Notes to Accounts

Particulars	31st March 2017 (Rs)	31st March 2016 (Rs)
1. Share capital
a) Equity share capital	3,00,000	2,00,000
b) Preference share capital	1,40,000	80,000
	4,40,000	2,80,000
2. Reserve and surplus
Surplus in statement of profit and loss at the beginning of the year	28,000
Add: Profit of the year	16,000
Less: Dividend	4,000
Profit at the end of the year	40,000

Additional Information:

Depreciation charged during the year Rs 32,000.

Solution:

Working Notes:

Answer 10

12. From the following Balance Sheet of Computer India Ltd., prepare cash flow statement.

		(Rs in '000)
Particulars	Note No.	31st March 2017 (Rs)	31st March 2016 (Rs)
I) Equity and Liabilities
1. Shareholders’ Funds
a) Share capital		50,000	40,000
b) Reserves and surplus-Surplus	1	3,700	3,000
2. Non-Current Liabilities
10% Debentures		6,500	6,000
3. Current Liabilities
a) Short-term borrowings	2	6,800	12,500
b) Trade payables		11,000	12,000
c) Short-term provisions	3	10,000	8,000
Total		88,000	81,500
II) Assets
1. Non-current assets
a) Fixed assets	4	25,000	30,000
2. Current assets
a) Inventories		35,000	30,000
b) Trade receivables		24,000	20,000
c) Cash and cash equivalents-cash		3,500	1,200
d) Other current assets-prepaid exp.		500	300
Total		88,000	81,500

Notes to Accounts

Particulars	31st March 2017 (Rs)	31st March 2016 (Rs)
1.	Reserve and surplus
	(i) Balance in statement of profit and loss	1,200	1,000
	(ii) General reserve	2,500	2,000
		3,700	3,000
2.	Short-term borrowings
	Bank Overdraft	6,800	12,500
3.	Short-term provisions
	(i) Provision for taxation	4,200	3,000
	(ii) Proposed dividend	5,800	5,000
		10,000	8,000
4.	Fixed Assets:
	Fixed Assets	40,000	41,000
	Less: Accumulated Depreciation	(15,000)	(11,000)
		25,000	30,000

Additional Information:

Interest paid on Debenture Rs. 600

Solution: