Class 12 Accountancy Chapter 11 Cash Flow Statement — Formulas & Key Points

Understanding precise terminology is critical for correct classification and adjustment. Cash includes currency in hand and demand deposits with banks. Cash Equivalents are short-term, highly liquid investments readily convertible to known amounts of cash with insignificant risk of change in value—typically investments with original maturity of three months or less (e.g., treasury bills, commercial paper). Operating Activities are the principal revenue-producing activities and other activities that are not investing or financing. Investing Activities are acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing Activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the enterprise. Direct Method reports major classes of gross cash receipts and payments, while Indirect Method starts with net profit or loss and adjusts for non-cash transactions, accruals, and changes in working capital. Non-cash charges include depreciation, amortisation, provision for doubtful debts, and any loss on sale of fixed assets. Non-operating items are gains/losses that do not belong to the main business activity, such as profit on sale of investments or assets.

Every item appearing in financial statements must be classified into one of three activities. The CBSE Board exam frequently asks you to identify the category of a transaction. Operating activities typically include cash receipts from sale of goods and services, receipts from royalties and commissions, payments to suppliers and employees, payments of income tax and other operating expenses. Investing activities cover payments to acquire fixed assets (PPE), receipts from disposal of fixed assets, payments to acquire shares/debentures of other entities (long-term investments), receipts from sale of such investments, interest and dividend received if the company is not a finance company. Financing activities include proceeds from issue of equity shares, proceeds from issue of debentures or long-term borrowings, repayment of loan principal, payment of dividends, payment of interest on borrowings (if not treated as operating). AS-3 allows interest paid and interest received to be classified as either operating or financing/investing; most NCERT problems treat interest paid as financing and interest received as investing unless the entity is a financial institution. Always read the question carefully to see if a specific treatment is mandated.

The Indirect Method is the most popular format in CBSE exams. It begins with Net Profit Before Tax (taken from the Statement of Profit and Loss), then systematically adds back all non-cash expenses and deducts all non-cash incomes to arrive at operating profit before working-capital changes. The core formula is: Cash Flow from Operating Activities (before WC changes) = Net Profit Before Tax + Non-cash Expenses − Non-cash Incomes. Non-cash expenses that are always added back include Depreciation on Fixed Assets, Amortisation of Intangible Assets, Provision for Doubtful Debts (new provision created), Discount on Issue of Debentures written off, Preliminary Expenses written off, Loss on Sale of Fixed Assets, Loss on Sale of Investments. Non-cash incomes that are always deducted include Profit on Sale of Fixed Assets, Profit on Sale of Investments, Dividend Received (if classified as investing), Interest Received (if classified as investing), Refund of Tax, Profit on revaluation of fixed assets transferred to P&L. After these adjustments, you adjust for changes in current assets and current liabilities to compute the final cash from operations before tax. Then deduct Income Tax Paid to get Cash Flow from Operating Activities.

After computing Operating Profit before Working Capital Changes, you must adjust for the movement in every current asset (except cash and bank) and every current liability. The golden rule: an increase in a current asset means cash has been used (subtract); a decrease in a current asset means cash has been released (add). An increase in a current liability means the firm has deferred payment and retained cash (add); a decrease in a current liability means cash has been paid out (subtract). The standard formula is: Cash Flow from Operating Activities (before tax) = Operating Profit before WC Changes − Increase in Current Assets + Decrease in Current Assets + Increase in Current Liabilities − Decrease in Current Liabilities. Current assets include Trade Receivables (Debtors and Bills Receivable), Inventories (Stock), Prepaid Expenses, and other short-term receivables. Current liabilities include Trade Payables (Creditors and Bills Payable), Outstanding Expenses, and Advance from Customers. Exclude Proposed Dividend and Provision for Tax from current liabilities when making these adjustments, as they are dealt with separately in financing and tax calculations. Finally, deduct Income Tax Paid during the year to arrive at net Cash Flow from Operating Activities.

For Investing Activities, you report actual cash paid for purchase of fixed assets and actual cash received from sale of fixed assets. The formula to compute cash paid for purchase of PPE (when not directly given) is: Cash Paid for Purchase = Closing PPE (Gross) − Opening PPE (Gross) + Book Value of Assets Sold. Book Value of Asset Sold = Cost − Accumulated Depreciation on that asset. If Profit on Sale is given, Sale Price = Book Value + Profit on Sale; if Loss on Sale is given, Sale Price = Book Value − Loss on Sale. Similarly, for Investments: Cash Paid for Purchase of Investments = Closing Investments − Opening Investments + Cost of Investments Sold. For Financing Activities, cash inflow from issue of shares = Closing Share Capital − Opening Share Capital + Bonus Shares Issued (which is non-cash, so add back) + Shares bought back (non-cash reduction, adjust accordingly). Cash inflow from issue of debentures = Closing Debentures − Opening Debentures + Debentures Redeemed during the year. Dividends paid in cash = Proposed Dividend at the start + Dividend declared during year − Proposed Dividend at the end. Interest paid = Interest charged to P&L + Opening Outstanding Interest − Closing Outstanding Interest. Repayment of loan = Opening Loan − Closing Loan + Fresh Borrowings during the year.

The standard CBSE Board format under AS-3 Indirect Method is structured as follows. At the top, state the company name and 'Cash Flow Statement for the year ended…'. Section A: Cash Flow from Operating Activities. Line 1: Net Profit Before Tax (from P&L). Add back non-cash and non-operating expenses, deduct non-cash and non-operating incomes to reach Operating Profit Before Working Capital Changes. Then adjust increases/decreases in Current Assets and Current Liabilities to get Cash Generated from Operations. Deduct Income Tax Paid to arrive at Net Cash from Operating Activities (A). Section B: Cash Flow from Investing Activities. List all outflows (purchase of fixed assets, purchase of investments) with a minus sign or in brackets, and all inflows (sale of fixed assets, sale of investments, interest received, dividend received) with a plus sign. Sum to get Net Cash from/(used in) Investing Activities (B). Section C: Cash Flow from Financing Activities. List inflows (proceeds from shares, debentures, loans) and outflows (repayment of loans, redemption of debentures, dividends paid, interest paid). Sum to get Net Cash from/(used in) Financing Activities (C). Finally, compute Net Increase/(Decrease) in Cash and Cash Equivalents = A + B + C. Add Opening Cash and Cash Equivalents to get Closing Cash and Cash Equivalents, which should match the Balance Sheet figure. Always show workings as notes below the statement for any derived figure like purchase of assets or tax paid.

Students frequently lose marks due to incorrect signs and misclassification. Mistake 1: Adding Profit on Sale of Asset instead of deducting it. Remember, profit is a non-cash income; it inflates net profit, so subtract it to get cash. Mistake 2: Deducting an increase in creditors. An increase in creditors means you have not paid cash, so cash is higher—add it. Mistake 3: Treating Proposed Dividend as a current liability for WC adjustment. Proposed Dividend is not adjusted in WC changes; it is handled separately in Financing Activities when actually paid. Mistake 4: Forgetting to add back Depreciation. Depreciation is a non-cash charge; always add it back in the Indirect Method. Mistake 5: Confusing Closing balance with the change. For assets purchased, use the formula with opening and closing plus disposals—do not just take the closing figure. Mistake 6: Writing Purchase of Machine as a positive number. Purchases are outflows; show them as negative or in brackets. Mistake 7: Including Bank Overdraft in cash. A Bank Overdraft is generally treated as a financing activity (short-term borrowing) unless the question states it is part of cash equivalents under a cash-management arrangement. Mistake 8: Ignoring Outstanding Interest or Prepaid Interest when computing Interest Paid. Always adjust the P&L figure by opening and closing outstanding to find actual cash paid. Mistake 9: Not reading whether Interest Received is to be shown under Operating or Investing. Default NCERT practice: Investing, but if the entity is a finance company, it may be Operating. Mistake 10: Omitting Notes and Workings. CBSE marking schemes award method marks only when working notes are clear. Always label each working note with the corresponding item.

Problem: Net Profit Before Tax = ₹3,00,000. Depreciation = ₹60,000. Profit on Sale of Machinery = ₹15,000. Increase in Trade Receivables = ₹40,000. Increase in Inventories = ₹30,000. Increase in Trade Payables = ₹25,000. Decrease in Outstanding Expenses = ₹10,000. Income Tax Paid = ₹80,000. Calculate Cash Flow from Operating Activities. Solution: Step 1 – Adjust for non-cash items. Operating Profit before WC Changes = 3,00,000 + 60,000 (Depreciation added back) − 15,000 (Profit on Sale deducted) = ₹3,45,000. Step 2 – Adjust Working Capital. Trade Receivables increased by ₹40,000 → subtract 40,000. Inventories increased by ₹30,000 → subtract 30,000. Trade Payables increased by ₹25,000 → add 25,000. Outstanding Expenses decreased by ₹10,000 → subtract 10,000. Net adjustment = −40,000 − 30,000 + 25,000 − 10,000 = −55,000. Cash Generated from Operations = 3,45,000 − 55,000 = ₹2,90,000. Step 3 – Deduct Tax. Cash Flow from Operating Activities = 2,90,000 − 80,000 = ₹2,10,000.

Problem: Opening balance of Plant & Machinery (at cost) = ₹8,00,000. Closing balance (at cost) = ₹10,50,000. During the year, a machine costing ₹1,00,000 (accumulated depreciation ₹40,000) was sold for ₹70,000. Calculate cash paid for purchase of new Plant & Machinery. Solution: Step 1 – Identify Book Value of asset sold. Cost = ₹1,00,000. Depreciation = ₹40,000. Book Value = 1,00,000 − 40,000 = ₹60,000. Step 2 – Apply formula. Cash Paid for Purchase = Closing Cost − Opening Cost + Cost of Asset Sold. = 10,50,000 − 8,00,000 + 1,00,000 = ₹3,50,000. Verification: Opening ₹8,00,000 + Purchases ₹3,50,000 − Sold ₹1,00,000 = Closing ₹10,50,000. Correct. Sale proceeds of ₹70,000 (inflow) will appear separately under Investing Activities as cash received from sale of fixed asset. The purchase outflow is ₹3,50,000 shown in brackets in Investing Activities.

Problem: Proposed Dividend at the start of the year = ₹50,000. During the year, the company declared a dividend of ₹1,20,000. Proposed Dividend at the end of the year = ₹60,000. Interest on Debentures charged to P&L = ₹40,000. Outstanding Interest at the start = ₹5,000; at the end = ₹8,000. Calculate (a) Dividend Paid in cash, (b) Interest Paid in cash. Solution: (a) Dividend Paid in cash = Opening Proposed + Dividend Declared − Closing Proposed = 50,000 + 1,20,000 − 60,000 = ₹1,10,000. This ₹1,10,000 will be shown as an outflow under Financing Activities. (b) Interest Paid in cash = Interest Expense (P&L) + Opening Outstanding Interest − Closing Outstanding Interest = 40,000 + 5,000 − 8,000 = ₹37,000. This ₹37,000 is the actual cash outflow for interest, shown under Financing Activities. Note: If Outstanding Interest increases, it means less cash was paid; if it decreases, more cash was paid than the expense.

Use this box the night before your exam for rapid recall of every critical formula and rule. Cash Flow Statement = Operating + Investing + Financing. Indirect Method: Start Net Profit Before Tax, add Depreciation and Losses, subtract Profits and Incomes, adjust Working Capital (− ΔCA + ΔCL), deduct Tax Paid. Direct Method: Actual cash receipts − Actual cash payments (rarely asked in CBSE). Operating Activities: main business cash flows (sales, purchases, expenses, tax). Investing Activities: fixed assets and long-term investments (buy/sell), interest and dividend received. Financing Activities: equity and debt transactions, dividends and interest paid, loan repayments. Current Asset ↑ → Cash ↓ (subtract). Current Liability ↑ → Cash ↑ (add). Non-cash expenses (Depreciation, Amortisation, Loss on Sale) → Always Add Back. Non-cash incomes (Profit on Sale, Dividend Received, Interest Received if investing) → Always Subtract. Purchase of Asset = Closing − Opening + Cost Sold. Sale Proceeds = Book Value ± Profit/Loss. Dividend Paid = Opening Proposed + Declared − Closing Proposed. Interest Paid = Expense + Opening Outstanding − Closing Outstanding. Exclude Proposed Dividend and Provision for Tax from WC adjustments. Show outflows in brackets, inflows as positive. Closing Cash = Opening Cash + Net Increase. Always provide working notes. Memorise the three activity classifications and the WC adjustment rule—these are your foundation for every numerical in Chapter 11.

Cash Flow Statement problems demand systematic working note discipline and confident recall of every adjustment formula. CBSETUTOR.ai gives your child a 24×7 AI tutor that accepts photo uploads of handwritten doubts—snap a picture of your working and get a step-by-step correction, not just the answer. The platform covers every NCERT exercise and past CBSE Board question from Chapter 11, explaining the Indirect Method line-by-line and flagging common sign errors before they become exam mistakes. Whether your child struggles with WC adjustments, cannot remember the purchase-of-asset formula, or mixes up Operating and Financing classifications, CBSETUTOR.ai delivers instant, personalised feedback. At a flat ₹999 per month for any class from 6 to 12, one price covers unlimited questions across all subjects. Start your 3-day free trial today—no credit card, no auto-debit—and see your Accountancy scores improve as conceptual clarity replaces rote practice. Thousands of CBSE students rely on CBSETUTOR.ai to turn formula sheets into confident exam performance.