CBSE Class 12 Accountancy Chapter 11 Cash Flow Statement — 20 MCQs with Answers

A Cash Flow Statement reconciles the opening and closing cash balances by categorising all cash receipts and payments. Unlike the Profit and Loss account, which uses accrual accounting, the Cash Flow Statement reports actual cash movements. It is prepared using either the direct method (listing gross cash receipts and payments) or the indirect method (adjusting net profit for non-cash and non-operating items). For CBSE Class 12, you will primarily use the indirect method under operating activities. Operating activities reflect cash flows from the principal revenue-generating activities of the enterprise. Investing activities capture cash flows from the acquisition and disposal of long-term assets. Financing activities show cash flows from transactions with owners and creditors that change the size or composition of the equity and borrowings of the enterprise.

Operating activities include cash receipts from customers, cash payments to suppliers and employees, and other cash flows that do not qualify as investing or financing. Under the indirect method, you start with net profit before tax (or profit after tax, depending on the question), then add back non-cash expenses (depreciation, amortisation, loss on sale of assets, goodwill written off) and subtract non-cash incomes (gain on sale of assets, interest received if already included in profit). Next, adjust for changes in working capital: an increase in a current asset (debtors, inventory, prepaid expenses) is an outflow (subtract); an increase in a current liability (creditors, outstanding expenses) is an inflow (add). This adjusted figure gives you net cash from operating activities.

Investing activities include the purchase or sale of fixed assets (land, building, plant, machinery), long-term investments (purchase or sale of shares or debentures of other companies), and giving or recovering loans to third parties. Cash outflows are recorded when you buy an asset or lend money; cash inflows arise when you sell an asset or recover a loan. Remember to report the full sale proceeds (not just the profit or loss) under investing activities — the profit or loss component has already been adjusted in operating activities. Interest and dividends received are sometimes classified under operating activities (if they form part of the main business) or under investing activities, depending on the enterprise's accounting policy; CBSE questions usually treat interest received as operating.

Financing activities arise from changes in the size and composition of the owner's capital and borrowings. Cash inflows include proceeds from issuing equity shares, preference shares, or debentures, and raising long-term loans from banks or financial institutions. Cash outflows include redemption (buyback) of preference shares or debentures, repayment of long-term loans, and payment of dividends to shareholders. Interest paid on borrowings can be classified as operating or financing; the NCERT framework usually treats interest paid as operating (because it arises from funds used in operations), but always read the question carefully. Interim dividend and proposed dividend paid in cash during the year are financing outflows; proposed dividend that remains unpaid at year-end is not a cash flow in the current year.

Some significant transactions do not involve cash at all and are therefore excluded from the Cash Flow Statement, though they should be disclosed in the notes. Examples include issue of bonus shares, conversion of debentures into equity shares, purchase of an asset by issuing shares or debentures, and acquisition of a business by exchange of shares. These are important for understanding the overall financial position but do not affect cash. Similarly, a proposed dividend that has not been paid by the balance-sheet date is not a cash flow for the current year; it will appear next year when actually paid. When presenting the Cash Flow Statement, start with net cash from operating activities, then add/subtract net cash from investing activities, then add/subtract net cash from financing activities, arriving at the net increase or decrease in cash and cash equivalents. Finally, add the opening balance of cash to arrive at the closing balance.

Cash Flow Statement MCQs in the CBSE Class 12 Accountancy board paper are typically worth 1 mark each and test quick conceptual recall or single-step application. Read the question stem carefully — note whether it asks for classification (operating/investing/financing), treatment (add back or deduct), or the cash amount. Eliminate obviously wrong options first. For adjustment questions, remember the golden rule: non-cash expenses are added back; non-cash incomes are deducted; increases in current assets are deducted (cash tied up); increases in current liabilities are added (cash saved). If a question involves a sale of asset, recall that the full sale proceeds go to investing, while only the gain or loss is adjusted in operating. Manage your time: spend no more than 45 seconds per MCQ. If you are unsure, mark your best guess and move on — revisit if time permits. Practise at least 50 MCQs from past papers, sample papers, and the NCERT exemplar to build speed and accuracy. Finally, cross-check your marked answer before moving to the next question; silly mistakes in MCQs are costly because there is no partial credit.

Students often confuse the treatment of gain versus proceeds: remember, the gain on sale of an asset is subtracted from profit (it inflated profit but is not an operating cash flow), and the full sale proceeds appear under investing activities. Another frequent error is treating proposed dividends as cash outflows in the year they are declared — they become outflows only when paid. Do not add back interest paid or interest received to profit indiscriminately; interest paid is usually left in operating (not added back), while interest received is already in profit and may need to be reclassified if the question asks for it under investing. For changes in working capital, ensure you know the direction: an increase in inventory or debtors reduces cash (subtract); an increase in creditors or outstanding expenses increases cash (add). Finally, read the question's format: if it says 'cash from operating activities', you must stop after operating; if it says 'net cash flow', you sum all three activities. Practice will make these distinctions automatic.

Mastering Cash Flow Statement MCQs requires not just memorising the classification rules but also practising varied numerical scenarios until the logic becomes second nature. CBSETUTOR.ai gives you a 24×7 AI tutor that can answer your doubts in real time, explain why a particular option is correct, and even generate fresh practice questions tailored to CBSE Chapter 11. Whether you are stuck on why depreciation is added back or confused about working-capital adjustments, simply snap a photo of the question and upload it to the platform. The AI will walk you through the solution step by step, highlighting the NCERT concept behind each adjustment. All this at a flat ₹999 per month for classes 6–12, with a 3-day free trial so you can explore the features risk-free. Thousands of Class 12 students have used CBSETUTOR.ai to clarify tricky accountancy concepts and boost their board scores by 10–15 marks. Try it today and turn Cash Flow Statement from a dreaded topic into a scoring opportunity.