Unit – 6 Cash Flow Statement

Cash Flow Statement

Introduction to Cash Flow Statement

A Cash Flow Statement shows the inflows and outflows of cash and
cash equivalents during a period. It is divided into three main activities:
1. Operating Activities:
Day-to-day business activities like selling goods, paying salaries, etc.
 Cash inflow: Cash received from customers
 Cash outflow: Cash paid to suppliers, salaries
2. Investing Activities:
Buying or selling long-term assets or investments.
 Cash inflow: Sale of machinery, investment income
 Cash outflow: Purchase of machinery, investment made
3. Financing Activities:
Activities that change the size of capital and borrowings.
 Cash inflow: Issue of shares, taking a loan
 Cash outflow: Loan repayment, dividend paid
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MCQs (Conceptual Theory)

Q1. Which of the following is a cash inflow from financing activity?
A. Interest received
B. Issue of shares
C. Sale of building
D. Dividend received
✅ Answer: B
Q2. Depreciation is added back to net profit in cash flow from
operating activities because:
A. It is a cash expense
B. It is a cash inflow
C. It is a non-cash expense
D. It is paid to creditors
✅ Answer: C
Unit – 6 Cash Flow Statement

Q3. Sale of fixed assets is classified under:

A. Operating activities
B. Investing activities
C. Financing activities
D. Non-cash activity
✅ Answer: B

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1. Cash Flow from Operating Activities

Method:
1. Start with Net Income:
Begin with the net income from the income statement.
2. Adjust for Non-Cash Items:
o Add back non-cash expenses like depreciation and
amortization.
o Subtract gains on the sale of assets.
o Add loss on sale of assets.
3. Adjust for Changes in Working Capital:
o Increase in current assets (like accounts receivable or
inventory): Subtract.
o Decrease in current assets: Add.
o Increase in current liabilities (like accounts payable): Add.
o Decrease in current liabilities: Subtract.

Practical Questions
Question 1:
Given the following information, calculate the Cash Flow from Operating
Activities using the indirect method:
 Net Income: $40,000
 Depreciation: $6,000
 Increase in Accounts Receivable: $4,000
 Decrease in Inventory: $2,000
Unit – 6 Cash Flow Statement

 Increase in Accounts Payable: $3,000

 Gain on Sale of Equipment: $1,500

Solution Steps:
1. Start with Net Income:
Net Income = $40,000
2. Add Non-Cash Expenses:
Add Depreciation: $40,000 + $6,000 = $46,000
3. Adjust for Changes in Working Capital:
o Increase in Accounts Receivable: Subtract $4,000 → $46,000 -
$4,000 = $42,000
o Decrease in Inventory: Add $2,000 → $42,000 + $2,000 =
$44,000
o Increase in Accounts Payable: Add $3,000 → $44,000 + $3,000 =
$47,000
4. Adjust for Non-Operating Gains:
Subtract Gain on Sale of Equipment: $47,000 - $1,500 = $45,500
Answer: Operating Cash Flow = $45,500

Question 2:
Calculate the Operating Cash Flow with the following data:
 Net Income: $30,000
 Amortization: $3,000
 Increase in Prepaid Expenses: $2,000
 Increase in Accrued Liabilities: $1,500
 Loss on Sale of Property: $1,000
Solution Steps:
1. Start with Net Income:
Net Income = $30,000
2. Add Non-Cash Expenses:
Add Amortization: $30,000 + $3,000 = $33,000
3. Adjust for Changes in Working Capital:
Unit – 6 Cash Flow Statement

o Increase in Prepaid Expenses: Subtract $2,000 → $33,000 -

$2,000 = $31,000
o Increase in Accrued Liabilities: Add $1,500 → $31,000 +
$1,500 = $32,500
4. Adjust for Non-Operating Gains:
Add Loss on Sale of Property: $32,500 + $1,000 = $33,500
Answer: Operating Cash Flow = $33,500

Advance part of Operating Activities-

Net Profit before Tax and Extraordinary Items ₹XXX
Adjustments for:
+ Depreciation ₹XXX
+ Loss on Sale of Asset ₹XXX
- Profit on Sale of Asset ₹(XXX)
+ Interest Expense ₹XXX
- Interest Income ₹(XXX)
- Dividend Income ₹(XXX)
---------------------------------------------------------------
Operating Profit before Working Capital Changes ₹XXX

Adjustments for Working Capital Changes:

- Increase in Current Assets (like Debtors, Stock) ₹(XXX)
+ Decrease in Current Assets ₹XXX
+ Increase in Current Liabilities (like Creditors) ₹XXX
- Decrease in Current Liabilities ₹(XXX)
---------------------------------------------------------------
Cash Generated from Operations ₹XXX

- Income Tax Paid ₹(XXX)

---------------------------------------------------------------
Net Cash Flow from Operating Activities ₹XXX
Example:
Unit – 6 Cash Flow Statement

Given:
 Net Profit: ₹1,20,000
 Depreciation: ₹10,000
 Profit on sale of asset: ₹5,000
 Increase in Debtors: ₹8,000
 Decrease in Creditors: ₹6,000
 Income tax paid: ₹12,000

2. Cash Flow from Investing Activities

Method:
1. Identify Purchases of Long-Term Assets:
Subtract any cash used to purchase assets like property,
equipment, or investments.
2. Identify Sales of Assets:
Add any cash received from the sale of long-term assets.
3. Investments in Securities:
Subtract any purchase of securities and add any proceeds from
their sale.
Unit – 6 Cash Flow Statement

Practical Questions
Question 1:
Given the following, calculate the Cash Flow from Investing Activities:
 Purchase of Equipment: $10,000
 Sale of Land: $15,000
 Purchase of Investments: $4,000
 Proceeds from Sale of Securities: $6,000

Solution Steps:
1. Purchase of Equipment: Subtract $10,000
2. Sale of Land: Add $15,000
3. Purchase of Investments: Subtract $4,000
4. Proceeds from Sale of Securities: Add $6,000
Investing Cash Flow = -$10,000 + $15,000 - $4,000 + $6,000 = $7,000
Answer: Investing Cash Flow = $7,000

Question 2:
Calculate the Cash Flow from Investing Activities with this data:
 Sale of Equipment: $5,000
 Purchase of Property: $20,000
 Proceeds from Sale of Stocks: $8,000
 Purchase of Bonds: $12,000
Solution Steps:
1. Sale of Equipment: Add $5,000
2. Purchase of Property: Subtract $20,000
3. Proceeds from Sale of Stocks: Add $8,000
4. Purchase of Bonds: Subtract $12,000
Investing Cash Flow = $5,000 - $20,000 + $8,000 - $12,000 = ($19,000)
Answer: Investing Cash Flow = ($19,000)
Unit – 6 Cash Flow Statement

3. Cash Flow from Financing Activities

Method:
1. Issuance of Stock or Debt:
Add cash received from issuing stock or debt.
2. Repayment of Debt:
Subtract cash used to repay debt.
3. Dividend Payments:
Subtract any cash used for dividend payments.

Practical Questions
Question 1:
Given the following information, calculate the Cash Flow from Financing
Activities:
 Issuance of Common Stock: $25,000
 Repayment of Loan: $7,000
 Dividends Paid: $4,000
 Issuance of Bonds: $15,000
Solution Steps:
1. Issuance of Stock: Add $25,000
2. Repayment of Loan: Subtract $7,000
3. Dividends Paid: Subtract $4,000
4. Issuance of Bonds: Add $15,000
Financing Cash Flow = $25,000 - $7,000 - $4,000 + $15,000 = $29,000
Answer: Financing Cash Flow = $29,000

Question 2:
Calculate the Cash Flow from Financing Activities with the following
data:
 Borrowed Funds from a Bank: $18,000
 Paid off a Long-Term Debt: $6,000
 Issued New Shares: $10,000
 Paid Dividends: $3,000
Unit – 6 Cash Flow Statement

Solution Steps:
1. Borrowed Funds: Add $18,000
2. Paid off Long-Term Debt: Subtract $6,000
3. Issued New Shares: Add $10,000
4. Paid Dividends: Subtract $3,000
Financing Cash Flow = $18,000 - $6,000 + $10,000 - $3,000 = $19,000
Answer: Financing Cash Flow = $19,000

Summary of Solutions
 Operating Cash Flow: Starts with net income, adjusts for non-cash
items, working capital changes, and non-operating gains/losses.
 Investing Cash Flow: Involves purchases and sales of long-term
assets and securities.
 Financing Cash Flow: Involves issuance of stock and debt,
repayments, and dividend payments.

Identify Cash Flow Activity Type

Q1. Identify the activity type:

Transaction Activity Type

Sale of land ₹25,000 ?

Paid Rent ₹5,000 ?

Issued Debentures ₹50,000 ?

Solution:
 Investing
 Operating
Unit – 6 Cash Flow Statement

 Financing

Q2. Identify the activity type:

Transaction Activity Type

Purchased Machinery ₹1,00,000 ?

Dividend Paid ₹15,000 ?

Received Interest ₹3,000 ?

Solutions:
 Investing
 Financing
 Investing/Operating (depends on treatment)

Cash Flow Statement Question Format:

Question:
Prepare a Cash Flow Statement using the indirect method for
[Company Name] for the year ended [Date], based on the
following details:
 Net Income: ₹[Amount]
 Depreciation: ₹[Amount]
 Changes in Working Capital:
o Increase in Accounts Receivable: ₹[Amount]
o Decrease in Accounts Payable: ₹[Amount]
o Increase in Inventory: ₹[Amount]
o Increase in Accounts Payable: ₹[Amount]
 Non-Cash Items:
o Gain on Sale of Equipment: ₹[Amount]
o Loss on Sale of Land: ₹[Amount]
 Investing Activities:
o Purchase of Equipment: ₹[Amount]
o Proceeds from Sale of Equipment: ₹[Amount]
Unit – 6 Cash Flow Statement

o Purchase of Land: ₹[Amount]

o Proceeds from Sale of Land: ₹[Amount]
 Financing Activities:
o [Any relevant financing activity, e.g., loan repayment, issue of
shares, etc.]

Solution Format:
Operating Activities:
1. Start with Net Income:
o Net Income: ₹[Amount]
2. Adjust for Non-Cash Items:
o Add Depreciation: ₹[Amount]
o Subtract/Add Gain/Loss on Sale of Assets: ₹[Amount]
(Subtract for gain, add for loss)
Adjusted Net Income = ₹[Adjusted Value]
3. Adjust for Changes in Working Capital:
o Increase in Accounts Receivable: ₹[Amount] (Cash Outflow,
subtract)
o Decrease in Accounts Payable: ₹[Amount] (Cash Outflow,
subtract)
o Increase in Inventory: ₹[Amount] (Cash Outflow, subtract)
o Increase in Accounts Payable: ₹[Amount] (Cash Inflow, add)
Net changes in working capital = ₹[Amount]
Unit – 6 Cash Flow Statement

Adjusted Cash Flow from Operations = ₹[Amount]

Investing Activities:
1. Purchase of Equipment: ₹[Amount] (Cash Outflow, subtract)
2. Proceeds from Sale of Equipment: ₹[Amount] (Cash Inflow, add)
3. Purchase of Land: ₹[Amount] (Cash Outflow, subtract)
4. Proceeds from Sale of Land: ₹[Amount] (Cash Inflow, add)
Net Cash Flow from Investing Activities = ₹[Amount]

Financing Activities:
 [Any relevant financing activities if provided]

Net Cash Flow for the Year:

 Cash Flow from Operations: ₹[Amount]
 Cash Flow from Investing Activities: ₹[Amount]
 Cash Flow from Financing Activities: ₹[Amount] (if applicable)
Net Cash Flow = ₹ [Total Amount]
Question 1:
Prepare a Cash Flow Statement for XYZ Ltd. for the year ending
31st December 2024. The following information is provided:
 Net Income: ₹50,000
 Depreciation: ₹8,000
 Increase in Accounts Receivable: ₹6,000
 Decrease in Accounts Payable: ₹4,000
 Gain on Sale of Equipment: ₹2,000
 Purchase of Equipment: ₹10,000
 Proceeds from Sale of Equipment: ₹5,000

Solution:
Operating Activities:
Unit – 6 Cash Flow Statement

1. Start with Net Income: ₹50,000

2. Adjust for Non-Cash Items:
o Add Depreciation: ₹8,000
o Subtract Gain on Sale of Equipment: ₹2,000
Adjusted Net Income = ₹50,000 + ₹8,000 - ₹2,000 = ₹56,000
3. Adjust for Changes in Working Capital:
o Increase in Accounts Receivable: ₹6,000 (Cash Outflow,
subtract)
o Decrease in Accounts Payable: ₹4,000 (Cash Outflow,
subtract)
Net changes in working capital = ₹6,000 + ₹4,000 = ₹10,000
Adjusted Cash Flow from Operations = ₹56,000 - ₹10,000 =
₹46,000

Investing Activities:
1. Purchase of Equipment: ₹10,000 (Cash Outflow, subtract)
2. Proceeds from Sale of Equipment: ₹5,000 (Cash Inflow, add)
Net Cash Flow from Investing Activities = ₹5,000 - ₹10,000 = ₹-
5,000
Financing Activities:
 No financing activities were provided in the question.
Net Cash Flow for the Year:
Operating Activities: ₹46,000
Investing Activities: ₹-5,000
Net Cash Flow = ₹46,000 - ₹5,000 = ₹41,000

Question 2:
Prepare a Cash Flow Statement using the indirect method for ABC
Corp. for the year ended 31st December 2024 from the following
details:
 Net Profit: ₹80,000
 Depreciation Expense: ₹12,000
Unit – 6 Cash Flow Statement

 Increase in Inventory: ₹10,000

 Increase in Accounts Payable: ₹7,000
 Loss on Sale of Land: ₹3,000
 Purchase of Land: ₹20,000
 Proceeds from Sale of Land: ₹5,000

Solution:
Operating Activities:
1. Start with Net Profit: ₹80,000
2. Adjust for Non-Cash Items:
o Add Depreciation: ₹12,000
o Add Loss on Sale of Land: ₹3,000
Adjusted Net Profit = ₹80,000 + ₹12,000 + ₹3,000 = ₹95,000
3. Adjust for Changes in Working Capital:
o Increase in Inventory: ₹10,000 (Cash Outflow, subtract)
o Increase in Accounts Payable: ₹7,000 (Cash Inflow, add)
Net changes in working capital = ₹10,000 - ₹7,000 = ₹3,000
Adjusted Cash Flow from Operations = ₹95,000 - ₹3,000 = ₹92,000

Investing Activities:
1. Purchase of Land: ₹20,000 (Cash Outflow, subtract)
2. Proceeds from Sale of Land: ₹5,000 (Cash Inflow, add)
Net Cash Flow from Investing Activities = ₹5,000 - ₹20,000 = ₹-
15,000

Financing Activities:
 No financing activities were provided in the question.
Net Cash Flow for the Year:
Operating Activities: ₹92,000
Investing Activities: ₹-15,000
Net Cash Flow = ₹92,000 - ₹15,000 = ₹77,000
Unit – 6 Cash Flow Statement