CBSE Class 12 Accountancy – Chapter 10: Cash Flow Statement
NCERT/CBSE-aligned study resource
1. Meaning
A Cash Flow Statement reports inflows and outflows of cash and cash equivalents during an accounting period. It explains how the opening cash balance changes into the closing balance.
2. Three Activities
| Activity | Typical examples |
|---|---|
| Operating | Cash from customers; cash paid to suppliers and employees |
| Investing | Purchase or sale of property, plant and equipment and investments |
| Financing | Issue of shares/debentures, borrowings, repayment of finance, dividends/interest as classified under applicable rules |
3. Direct and Indirect Methods
The direct method derives operating cash flows from major classes of gross cash receipts and payments. The indirect method starts with accounting profit and adjusts for non-cash items, non-operating items and changes in working capital.
Profit before tax → + non-cash expenses → − non-operating income → ± working-capital changes → operating cash flow before tax
4. Working Capital Adjustments
An increase in a current asset other than cash generally reduces operating cash flow, while a decrease generally increases it. An increase in a current operating liability generally increases operating cash flow, while a decrease generally reduces it, subject to the specific item and applicable classification.
5. Non-Cash Transactions
Transactions that do not involve cash or cash equivalents are not reported as cash flows themselves, although significant non-cash investing or financing transactions may require separate disclosure.
6. Reconciliation
Net cash flow from operating, investing and financing activities is combined with opening cash and cash equivalents to arrive at closing cash and cash equivalents.
Worked Illustration
If operating activities provide ₹80,000, investing activities use ₹30,000 and financing activities provide ₹20,000, net increase in cash = ₹80,000 − ₹30,000 + ₹20,000 = ₹70,000. If opening cash is ₹50,000, closing cash is ₹1,20,000.
Chapter-Specific MCQs
- Purchase of machinery for cash is generally: (A) investing activity (B) operating activity (C) financing activity (D) non-cash activity. Answer: A.
- Under the indirect method, depreciation is generally: (A) added back to accounting profit (B) deducted twice (C) treated as financing inflow (D) ignored completely. Answer: A.
- Increase in a typical operating current asset generally: (A) reduces operating cash flow (B) increases operating cash flow (C) has no possible effect (D) is always financing. Answer: A.
Practice Set
- Classify transactions into operating, investing and financing activities.
- Prepare operating cash flow using the indirect method from supplied profit and adjustments.
- Prepare a complete Cash Flow Statement and reconcile opening and closing cash.