NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Detailed, Step-by-Step NCERT Solutions for 12 Accountancy Chapter 11 Cash Flow Statement Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Cash Flow Statement NCERT Solutions for Class 12 Accountancy Chapter 11

Cash Flow Statement Questions and Answers Class 12 Accountancy Chapter 11

Test your Understanding-1 (Page No. 287)

Classify the following activities into operating activities, investing activities, financing activities, cash activities.
1. Purchase of machinery
2. Proceeds from issuance of equity share capital
3. Cash Sales
4. Proceeds from long-term borrowings .
5. Proceeds from sales of old machinery
6. Cash receipt from debtors
7. Trading commission received
8. Purchase of investment
9. Redemption of preference shares
10. Cash purchase
11. Proceeds from sale of Investment
12. Purchase of goodwill
13. Cash paid to supplier
14. Interim dividend paid on equity shares
15. Wages and salaries paid .
16. Proceeds from sale of patents
17. Interest received on debentrues held as investments
18. Interest paid on long-term borrowings
19. Office and administrative expenses paid
20. Manufacturing overhead paid
21. Dividend received on shares held as investment
22. Rent received on property held as investment
23. Selling and distribution expenses paid
24. Income tax paid
25. Dividend paid on preferences shares
26. Underwriting commission paid
27. Rent paid –
28. Brokerage paid on purchase of investment
29. Bank overdraft
30. Cash credit ‘
31. Short-term deposit
32. Marketable securities
33. Refund of income-tax received.
Answer:
(a) Operating Activities—
3. Cash sales
6. Cash .receipts from debtors
7. Trading commission Received
10. Cash purchases
13. Cash paid to supplier
15. Wages and salaries paid
19. Office and administrative expenses
20. Manufacturing overhead paid
23. Selling and distribution expenses paid
24. Income tax paid
27. Rent paid

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

(b) Investing Activities—
1. Purchase of machinery
5. Proceeds from sale of old machinery
8. Purchases of investment
11. Proceeds from sale of investment
12. Purchase of goodwill
16. Proceeds from sale of patents
17. Interest received on debentures held as investments
21. Dividend received on shares held as investment
22. Rent received on property held as investment
29. Bank overdraft

(c) Financing Activities—
2. Proceeds from issunace of equity share
4. Proceeds from long-term borrowing
9. Redemption of preference shares
14. Interim dividend paid on equity shares
18. Interest paid on long-term borrowings
25. Dividend paid on preferences shares
26. Underwriting commission paid
28. Brokerage paid on purchase of investment

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

(d) Cash Equivalents—
30. Cash credit
31. Short-term deposit
32. Marketable securities
33. Refund of income-tax received.

Test your Understanding-11 (Page No. 297-298)

Question 1.
Choose one of the two alternatives given below and fill in the blanks in the following statements:
(a) If the net profits earned during the year is Rs. 50,000 and the amount of debtors in the beginning and the end of the year is Rs. 10,000 and Rs. 20,000 respectively, then the cash from operating activities will be equal to Rs (Rs. 40,000/Rs. 60,000)
(b) If the net profits made during the year are Rs. 50,000 and the bills receivables have decreased by Rs. 10,000 during the year then the cash flow from operating activities will be equal to Rs (Rs. 40,000/Rs.60,000)
(c) Expenses paid in advance at the end of the year are the profit made during the year (added to/deducted from).
(d) An increase in accrued income during the particular year is the net profit (added to/deducted from.)
(e) Goodwill written off is the profit made during the year for calculating the cash flow from operating activities (added to/deducted from)
(f) For calculating cash flow from operating activities, provision for doubtful debts is the profit made during
the year (added to/deducted from).
Answer:
(a) Rs. 40,000
(b) Rs. 60,000
(c) deducted from
(d) deducted from
(e) added to
(f) added to

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 2.
While computing cash from operating activities, indicated whether the following items will be added or subtracted from the net profit—if not to be considered write NG.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 1
Answer:
(a) Increase in the value of creditors will be added to net profit, while computing cash from operating activities.
(b) Increase in the Value of patents will not to be considered (NC) while computing cash from operating activities.
(c) Decrease in prepaid expenses will be added to the net profit while computing cash from operating activities.
(d) Decrease in income received in advance will be subtracted
from the net profit while computing cash from operating activities.
(e) Decrease in value of stock will be added to the net profit while computing cash from operating activities.
(f) Increase in Share Capital will not to be considered (NC) while computing cash from operating activities.
(g) Increase in the value of bills receivables will be subtracted from the net profit while computing cash from operating activities.
(h) Increase in the amount of outstanding expenses will be added to the net profit while computing cash from operating activities.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement
(i) Conversion of debenture into share will not be considerd (NC) while computing cash from operating activities.
(j) Decrease in the value of bills payables will be subtracted from the net. prof it while computing cash from operating activities.
(k) Increase in the value of debtors will be subtracted from net profit while computing the cash from operating activities.
(l) Decrease in the amount of accrued income will be added to net profit while computing the cash from operating activities.

Do it Yourself (Page No. 296-297)

Question 1.
The Profit and Loss Account of Raj Limited is given here under:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 2
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 3
Ascertain Cash from Operations. Show your workings clearly.
Answer:
Cash Flows from Operating Activities
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 4

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Working Note
1. Net Profit before taxation and extra-ordinary item
= Rs. 15,80,000 + Rs. 8,00,000

2.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 5

Question 2.
From the following information calculate net cash from operations:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 6
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 7
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 8

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Do it Yourself (Page No. 300-301)

Question 1.
From the following particulars, calculate cash flows from investing activities:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 9
Interest received on debentures held as investment Rs. 60,000
Dividend received on shares held as investment Rs. 10,000
A plot of land had been purchased for investment purposes and was let out for commercial use and rent received Rs. 30,000.
Answer:
Cash Flow from Investing Activities
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 10

Question 2.
From the following information, calculate cash flows from investing and the financing activities
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 11
In year 2006, machine costing Rs. 2,00,000 was sold at a profit of Rs. 1,50,000, Depreciation charged on machine during the year 2006 amounted to Rs. 2,50,000.
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 12

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Short Answer Type Questions

Question 1.
What is a Cash Flow Statement?
Answer:
Cash Flow Statements—-Cash Flow Statement is a statement which shows Inflows (receipts) and Outflows (payments) of cash and its equivalents in an enterprise during a specified period of time. Accounting Standard (AS-3) Revised issued by the Institute of Chartered Accountant of India on Cash How Statement in March 1997 has defined Cash Flow Statement as “A statement which shows inflows (receipts) and outflows (payment) of cash and its equivalents in an enterprise during a specified period of time.”

According to the Revised Accounting Standard 3, an enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented.

The terms, Cash, Cash-Equivalents and Cash Flows explained below:

Cash: It comprises cash in hand and demand deposits with bank.

Cash-Equivalents: They are short term highly liquid investments that are readily convertible into cash and which are subject to an insignificant risk of change in value. An investment normally qualifies as cash equivalent only when it has a short maturity, of say three months or less from the date of acquisition. Cash equivalent are held for the purpose of meeting short term cash commitments rather than for investment or other purpose.

Cash-Flows : These are inflows and outflows of cash and cash- equivalents. An inflows increases the total cash and cash-equivalents at the disposal of the enterprise whereas an outflow decrease them.

As per AS-3, cash flows exclude movements between items that contribute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing or financing activities.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Benefits of Cash Flow Statement:
Cash Flow Statement is a useful financial statement and provides the following benefits:
(a) It enables the management to identify the magnitude and directions of changes in cash.

(b) It enables the users to evaluate the changes in economic resources of an enterprise.

(c) It enables the users to evaluate the changes in financial structure.

(d) It enables the users to evaluate the changes in net assets of an enterprises.

(e) It enables the users to evaluate the enterprise’s ability to alter the amounts and timings of cash flows in order to adapt to changing circumstances and opportunities.

(f) It is useful in assessing the ability of the enterprise to generate Cash and Cash Equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises.

(g) As a tool of planning, the projected Cash Flow Statement enables the management to plan its future investment, operating and financial activities such as repayment of long term loans and interest there on, modernisation or expansion of plant, payment of cash dividend etc.

(h) It helps in efficient cash management. The management can know the adequacy or other wise of cash and can plan for the effective use of surplus cash or can make the necessary arrangement in case of an inadequacy of Cash.

(i) It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminate the effects of using different accounting treatments for the same trasactions and events.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 2.
How the various activities are classfied (as per AS-3 revised) while preparing cash flow statement?
Answer:
Classification of Cash Flows :
A cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. As per AS-3, these activities can be classified in to three categories which are following :
1. Operating Activities
2. Investing Activities
3. Financing Activities

1. Operating Activities—Operating activities are the principal
revenue producing activities of the enterprise and other activities that are not investing or financing activities. Cash flows from operating activities generally result from the transactions and other events that enter into the determination of net profit or loss. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise to pay dividend, repay loans and make investments without resources to extent source of financing.

2. Investing Activities—As per AS-3 Investing activities are the acquisition and disposal of long-term assets (such as land, building, plant, machinery etc.) and other investment not included in cash equivalent. It is important to make a separate disclosure of cash flows arising from investing activities because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

3. Financing Activities—As per AS-3, Financing activities are activities that result in changes in the size and composition of the owner’s capital (including preference share capital in the case of a company) and borrowings of the enterprise. The separate disclosure of cash flows from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 3.
State the uses of cash flow statement?
Answer:
Along with balance sheet and income statement, the statement of cash flows would assists the users of financial statements in the following way :
1. To analyse the reasons for change in cash balance of the enterprise.
2. To judge the enterprise ability to pay its debts, to pay dividends to its shareholders and to pay interest on loans.
3. To assess the enterprise’s need to borrow cash.
4. To find out the reasons for difference between the enterprise net income, cash payment and cash receipts.
5. To analyse reasons for change in enterprise’s financial position including investing and financial activities during a period of time.

Question 4.
What are the objectives of preparing cash flow statement?
Answer:
Objectives of Cash Flow Statement:
The basic objectives of Cash Flow Statement is to highlight the change in the cash position including the sources from which cash was obtained by the enterprise and specific uses to which cash was applied. The cash flow statement serves a number of objectives which are following:

1. Depict Inflows and Outflows of Cash :
Cash flow statement gives information about cash inflows and cash outflows of an enterprise during a particular period from operating activities, investing activities and financing activities. It is an effective tool of managing cash.

2. Cash flow information helps in Planning :
Cash flow statement provide information for planning for short range cash needs of the enterprise. It helps in formulation of financial policies.

3. Helping in understanding the Liquidity of the Enterprise : Cash Flow Statement helps the enterprise to assess whether it would meet its current obligation or not. It also helps the lending institution like banks etc. to ascertain the liquidity of the enterprise.

4. Help pi preparing Cash Budget:
Cash Flow Statement helps the management of the firm in preparing Cash Budget.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

5. Analysis Management of cash :
Cash flow statement reveal good and bad points relating to the management of cash.
According to AS-3 (Revised) the objectives of cash flow statement are as follows : “Information about the cash flow of an enterprise is useful in providing users of financial statement with a basis to assess the ability of the enterprise to generate cash and cash equivalent and the needs of the enterprise to utilise these cash flows.

The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The statement deals with the provision of information about the historical changes in cash and cash equivalent of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

Question 5.
Explain the terms: Cash Equivalents, Cash Flows.
Answer:
(i) Cash Equivalents—They are short term highly liquid investments that are readily convertible into cash and which are subject to an insignificant risk of change in value. An investment normally qualifies as cash equivalents only when it has a short term maturity, of say three months or less from the date of acquisition.

Cash equivalent are held for die purpose of meeting short term cash commitments rather than for investment or other purpose. Examples of cash equivalents are treasury bills, commercial papers etc. which are purchased with cash that is in excess of immediate needs.

(ii) Cash Flows—Cash Hows are inflows and outflows of cash and cash equivalents. An inflow increases the total cash and cash equivalents at the disposal of the enterprise where as an outflow decreases them. As per AS-3, Cash Flow include movements between items that constitute cash or cash equivalents because the components are part of the cash management of an enterprise rather than part of operating, investing or financing activities.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 6.
Prepare a format of cash flow from operating activities under direct method and indirect-method.
Answer:
Cash Flows From Operating Activities—Operating activities are the main source of revenue and expenditure in an enterprise. Therefore,the ascertainment of Cash Flows From Operating Activities is of prime importance.

As per AS-3, an enterprise should report Cash Flow From Operating Activities using either by
Direct Method
OR
Indirect Method
In direct method, major classes of gross cash receipts and gross cash payments are disclosed.
OR
In indirect method, net profit or loss is adjusted for the effects of
(i) transaction of a non-cash nature.
(ii) any deferrals or accruals of past/future operating Cash receipts.
(iii) Items of income or expenses associated with investing or financing cash flows.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Direct Method
As we know that items are recorded on accrual basis in Profit and Loss Account therefore certain adjustments are made to convert them into cash basis. These adjustments are discussed below :
1. Cash Inflow from Sales—Total Sales include Cash Sale and Credit Sale both. Cash sales is a cash inflow, but in case of credit sales, cash receipts from Debtors is calculated as follows—
Cash receipts from Customers
= Credit Sales + Opening Debtors and Bills Receivable – Closing Debtors and Bills Receivable – Bad Debts – Discount Allowed – Sales Returns.

2. Cash Ouflow from Purchases—Total Purchases include both cash purchases and credit purchases. Cash purchases are cash outflow, but in case of credit purchases, cash paid to the suppliers is calculated as follows—
Cash paid to Suppliers = Credit purchases + Opening
Creditors and Bills Payable – Closing Creditors and Bills Payable – Discount received – Purchases Returns.
Purchases = Cost of Goods sold – Opening Stock + Closing Stock

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

3. Cash Outflow on Expenses Incurred—The figures of expenses given in the Profit and Loss Account have to be adjusted to find out cash outflow. The amount outstanding and the amount paid in-advance have to be adjusted for this purpose.

Cash paid for Expenses = Expenses as given in Profit & Loss A/c – Prepaid Expenses in begining and Outstanding Exp. at the end + Prepaid Expenses at the end and Outstanding Expenses in the begining.

However, following items are not to be considered—
1. All non-cash items are ignored as no cash is involved in them. Examples are—
(a) Depreciation
(b) Discount on Issue of Shares written off
(c) Goodwill written off
(d) Preliminary Expenses written off
(e) Discount on Issue of Debenture written off
(f) Patents and Copyright written off
(g) Underwriting commission written off.

2. Appropriations of tiansfer to different reserves and provision like to General Reserve, Provision for Taxation and Proposed Dividend should be ignored.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

3. Items which are classified as investing or financing activities like profit or loss on sale of fixed assets, interest received, dividend paid etc are also ignored.NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 13

Indirect Method
In this method, net profit or loss is adjusted for the effects of transactions of a non-cash nature flow. In other words, Net profit or loss is adjusted for items which affected net profit but did not affect cash.

As per AS-3, (Revised), under indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:

1. Non-cash items are to be added back. Non-cash items like
(a) Depreciation
(b) Goodwill written off
(c) Patents and Copyrights written off
(d) Appropriation to General Reserve
(e) Interim dividend
(f) Deferred taxes etc.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

2. All other items for which the cash effects are investing or financing cash flows. The treatment of such items depend upon their nature. All investing and financing incomes are to be deducted, from the amount of net profits while all such expenses are to be added back.

3. Changes in current assets and liabilities during the period. Increase in current assets and decrease in current liabilities are to be deducted while increase in current liabilities and decrease in current assets are to be added up.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 14
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 15

Question 7.
Now that you know the meaning of operating activities, state clearly what would constitute the operating activities for the following types of enterprises :
(1) Hotel
(ii) Film production house
(iii) Financial enterprise
(iv) Media enterprise
(v) Steel manufacture unit
(iv) Software business unit
Answer:
(i) Hotel (1) Payment of salary and wages to staff.
(2) Payment for the electricity, water, vegetables and other items for the Hotel.
(3) Payment for the items purchase for the Hotel accomodation.
(4) Receipts from the customer for staying in Hotel.
(5) Receipts from the other companies for taking Hotel for rent.

(ii) Film production house—Payment for the set, staff, actors and actress, director, music directors etc. Receipt from the distibutors for selling rights of the film.

(iii) Financial Enterprises—Payment for the loan, buying shares and payment for dividend and interest.
Receipt for the repayment of loan, interest, dividend etc.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

(iv) Media Enterprise—Payment to the staff, reporters, photographers etc.
Receipts from the companies who advertise their products through media.

(v) Steel manufacturing unit—Payment for the raw material (iron), salary and Wages for staff, coal and other materials. Receipts from the market by selling steel.

(vi) Software business unit—Payment of salary to their staff. Receipts from the customer for selling their softwares and maintaining their computers.

Question 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.
Answer:
Yes, it is true that the nature/type of enterprise can change altogether the category into which a particular activity may be classified. For example, in case of a financial enterprise (whose main business is lending and borrowing), interest paid, interest-received and dividend received are classified as operating activities while dividend paid is the financing activity but in case of a non-financial enterprise, as per AS-3, it is considered more appropriate that payment of interest and dividend paid are classified as financing activities whereas receipt of interest and dividends are classified as investing activities.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Long Answer Type Questions

Question 1.
Describe the procedure to prepare Cash Flow Statement.
Answer:
Procedure of preparation of Cash Flow Statement—The Institute of Chartered Accountants of India has issued Accounting Standard (AS-3) Revised, for preparing a Cash Flow Statement. This Accounting Standard has been made mandatory in repect of accounting periods commencing on or after 1st April, 2001, for certain enterprises. These enterprises are:

(i) Enterprises whose equity or debt securities are listed on a recognised stock exchange in India, and enterprises that are in process of isuing equity or debt securities that will be listed on a recognised Stock Exchange in India.

(ii) All other commercial, industrial and business enterprises, whose turnover for the accounting period exceeds Rs. 50 Crores. As such, the cash flow statement has been prepared according to AS-3 Revised. According to AS-3 Revised, the cash flow statement summarizes the cash inflows and cash outflows and the net changes (increase or decrease) in cash and cash equivalents resulting from operating, investing and financial activities of a firm duririg a period.

The following terms are used for preparing a cash flow statement:
Cash: It comprises cash in hand and demand deposits with banks.

Cash Equivalents—These are short-term, highly liquid investments that are readily convertible into known amounts of cash and which present insignificant risk of changes in their values. Normally, an investment will be termed as cash equivalent only if it has a short maturity period, say three month or less, from the date of its acquisition.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Examples of cash equivalents are treasury bills, commercial papers etc. which are purchased with cash that is in excess of immediate needs. Investment in shares are excluded from cash equivalents unless they are cash equivalents in reality.

For example the preference shares of a company which are purchased shortly before their redemption date will be included in cash equivalents provided there is only an insignificant risk of failure of the company in repaying the amount at the date of maturity.

Classification of Cash Flow—According to AS-3 (Revised), a cash flow statement should be presented in a manner that it reports inflows and outflows of cash by classifying them into three categories, namely : operating, investing and financing activities.

Classification of all activities into these three categories helps the users of cash flow statement to assess the effect of these activities on the cash and cash equivalents of the enterprise. Such information will be helpful in evaluating the relationship among these three activities. These three activities are explained as below :

(i) Cash Flow from Operating Activities—Operating activities are the main revenue generating activities of an enterprises. As such they include cash flows from those transactions and events which enter into the ascertainment of net profit or loss of the enterprise. Examples of cash flows arising from operating activities are :
(a) Cash receipts from the sale of goods and rendering of services
(b) Cash receipts from royalities, fees, commissions and other revenue
(c) Cash payment to suppliers for goods and services
(d) Cash payment to and on behalf of employees
(e) Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits
(f) Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
(g) Cash receipts and payments relating to future contracts, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purposes.

(ii) Cash Flow from Investing Activities—Investing activities include the purchase and sale of long-term assets such as land, buildings, plant and machinery etc. not held for resale. These activities also include the purchase and sale of such investments which are not inlcuded in cash equivalents. Cash flow from investing activities discloses the expenditures incurred for resources intended to generate future income and cash flows. Examples of such cash flows arising from investing activities are:

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

(a) Cash payment to aquire fixed assets (including intangibles) and also payments for capitalised research and development costs and self constructed fixed assets
(b) Cash receipts from sale of fixed assets (including intangibles)
(c) Cash payments to aquire shares, warrants or debt instruments of other enterprises (other than payments for those instruments considered to be cash equivalents);
(d) Cash receipts from sale of shares, warrants or debt instruments of other enterprises (other than receipts for those instruments considered to be cash equivalent);
(e) Cash advances and loans made to third parties (other than advances and loans made by a financial enterprise).
(f) Cash receipts from the repayment of advances and loan made to third parties (other than advances and loans of a financial enterprise);
(g) Cash payments for future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financial activities;
(h) Cash receipts of insurance claim for property involved in accident; and
(i) Cash receipts of interest and dividend.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

(iii) Cash Flows from Financing Activities—Financing activities are the activities that result in change in capital’and borrowings of the enterprise. Examples of cash flows arising from financial activities are—
(a) Cash receipts from issuing shares or other similar instruments;
(b) Cash receipts from issuing debentures, loans, notes, bonds and other short term or long term borrowings;
(c) Cash repayments of amounts borrowed, buy-back of equity shares, redemption of preferene shares, debentures, notes, bonds etc., and
(d) Cash payment of interest and dividend.

Question 2.
Describe ‘Direct’ and ‘Indirect’ method of ascertaining cash flows from operating activities.
Answer:
Cash from Operating Activities—The net income is computed on the basis of accrual. To compute cash provided by operating activities we need to convert the operating activities being considered from accrual basis to cash basis. For this purpose, we can follow either ‘Direct Method’ or ‘Indirect Method’. The cash provided will be same, whatever method is used for computation. Accounting Standard 3 allows both methods for reporting cash from operating activities among Indian Companies.

Cash from Operating Activities-Direct Method—Under this method, we need to adjust each item in the income statement from accrued basis to cash basis. Cash receipts and cash payments related to revenues and expenses are determined and listed as cash inflows and outflows from operating activities. The net amount is reported in the last column as cash provided from operations.

Step 1: Determine cash provided by operating activities
(i) Cash receipts from customers : The revenue from sales is reported on accrual basis in the income statement. We add the amount of opening receivables to the net sales and to this we subtract amount or receivable at the end, bad debts written-off during the period and discount allowed to customers.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 16
(ii) Other cash receipts—The amount of other revenue like rent, income, commission earned, etc. are adjusted for any amounts not received or received in advance to determine cash received.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 17

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Step 2: Cash used in operating activities :
(i) Cash payment to suppliers—The income statement reports cost of goods sold on accrual basis. To determine the cash paid to suppliers, we need to first ascertain purchases. The closing stock of goods is added to cost of goods sold and opening stock is subtracted there from to compute the purchases during the period.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 18
We need to add the creditors (Account Payables) in the beginning of the period to the amount of purchases and subtract closing creditors (Accounts Payables) therefrom for computing the amount paid to suppliers.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 19

(ii) Cash payment for operating expenses—Operating expenses are reported in the income statement on accrual basis. We need to adjust the operating expenses for outstanding expenses and prepaid expenses to ascertain cash payment for operating expenses.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 20

(iii) Cash payment for income tax—The income statement indicates the provision made for income tax. The comparative balance sheet indicates the amount of tax payable in the beginning and at the end of the period. We can compute the cash payment for income tax as follows:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 21

(iv) Payments for Interest—Though interest expense is subtracted from revenues to compute net income, according to Accounting Standard 3 cash flows arising from interest paid and interest/dividend received in cash of financial enterprise should be reported as cash flow from operating activities. In the case of other enterprises, cash flows from interest paid should be classified as financing activities and cash flows from interest and dividends received should be reported as cash flows from investing activities.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Indirect Method
In this method, net profit or loss is adjusted for the effects of transactions of a non-cash nature flow. In other words, Net profit or loss is adjusted for items which affected net profit but did not affect cash. As per AS-3, (Revised), under indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:

1. Non-cash items are to be added back. Non-cash items like
(a) Depreciation
(b) Goodwill written off
(c) Patents and Copyrights written off
(d) Appropriation to General Reserve
(e) Interim dividend
(f) Deferred taxes etc.

2. All other items for which the cash effects are investing or financing cash flows. The treatment of such items depend upon their nature. All investing and financing incomes are to be deducted from the amount of net profits while all such expenses are to be added back.

3. Changes in current assets and liabilities during the period. Increase in current assets and decrease in current liabilities are to be deducted while increase in current liabilities and decrease in current assets are to be added up.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 22
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 23

Question 3.
Explain the major Cash Inflow and outflow from investing activities.
Answer:
Cash Flows from Investing Activities—Investing activities mean the acquisition and disposal of long-term assets and other investments not included in cash equivalent. Hence, investing activities include transactions that involve the purchase and sale of long-term assets like land, building, plant and machinery, etc, not held for resale and other investments.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

The separate disclosure of cash flows arising from investing activities is significant because the cash flow represent the exent to which expenditures have been made for resources to generate future income and cash flows.

Examples of cash arising from investing activities are :
(a) Cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and development costs and self-constructed fixed assets
(b) Cash receipts from disposal of fixed assets (including intangibles)
(c) Cash payments to acquires shares, warrants, or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes)
(d) Cash receipts from disposal of shares, warrants, or debt instruments of other enterprises and interests in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes)
(e) Cash advances and loans made to third parties (other than advances and loans made by a financial enterprises)
(f) Cash receipts from the repayment of advances and loans made to third parties (other than advances and loans of a financial enterprise)
(g) Cash payments for future contracts, forward contracts, option contracts, and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
(h) Cash receipts from future contracts, forward contracts, option contracts, and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 24

Question 4.
Explain the major Cash Inflows and outflows from financing activities.
Answer:
Cash Flows from Financing Activities—financing activities are activities that cause changes in the size and composition of capital and borrowings of the firm. The examples of cash flows arising from financing activities are
(a) Cash proceeds from issuing shares or similar other instruments;
(b) Cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings;
(c) Cash repayments of amount borrowed, and
(d) Payment of Dividend.

Special Items—AS-3 (Revised) provides for the treatment of certain special items as under :
(a) Foreign Currency Cash Flows—Cash flows arising from transactions in a foreign currency should be recorded in an enterprise’s reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and foreign currency at the date of cash flow. A rate that approximates actual rate may be used if the result is substantially the same as would arise if the rates at the date of cash flows were used. Unrealised gains and losses arising from changes in foreign exchange rate changes on cash and cash equivalent held or due in foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period.

(b) Extraordinary items—Cash flows associated with extraordinary items such as claims from insurance company, compnay’s winning a law suit or lottery, etc. should be classified as arising from operating, investing or financing activities and separately disclosed in cash flow statement.

(c) Interest and Dividends—Cash flow from interest and dividends received and paid should each be disclosed separately. Cash flows arising from interest paid and interest and dividends received in the case of a financial enterprise should be classified as cash flow arising from operating activities. In case of other enterprises, cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. Dividends paid should be classified as cash flow from financing activities.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

(d) Taxes on Income—Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

(e) Acquisition and disposals of Subsidiaries and other Business Units—Tire aggregate cash flows arising from acquisition and from disposals of subsidiaries or other business units should be presented separately and classified as investing activities.

(f) Non-cash Transactions—Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities. The exclusion of non-cash transactions from the cash flow statement is consistent with the objective of a cash flow statement as these do not involve cash flows in the current period. Examples of non¬cash transactions are :
(i) the acquisition of assets by assuming directly related liabilities;
(ii) the acquisition of an enterprise by means of issue of shares; and
(iii) the conversion of debt to equity.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 26

Numerical Questions

Question 1.
Anand Ltd. arrived at a net income of Rs. 5,00,000 for the year ended March 31,2007. Depreciation for the year was Rs. 2,00,000. There was a gain of Rs. 50,000 on assets sold which was credited to profit and loss account. Bills Receivables increased during the year Rs. 40,000 and Bills Payables also increased by Rs. 60,000. Compute the cash flows operating activities by the indirect approach.
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 27
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 28

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 2.
From the information given below you are required to prepare the cash paid for the inventory :
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 29
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 30

Question 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% drawn 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 machineary of original cost Rs. 2,00,000 with an accumulated depreciation of Rs. 1,60,000 for Rs. 60,000.
[Ans. Rs. 50,000 investing flow (out flow); Rs. 2,00,000 investing flow (outflow); Rs. 60,000 investing flow (outflow).]
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 31

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 4.
The following is the Profit and Loss Account of Yamuna Limited:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 32
Additional Information:
(i) Trade debtors decrease by Rs. 30,000 during the year.
(ii) Prepaid expenses increase by Rs. 5,000 during the year.
(iii) Trade creditors decrease by Rs. 15,000 during the year.
(iv) Outstanding expenses increase by Rs. 3,000 during the year.
(v) Operating expenses included depreciation of Rs. 25,000. Compute net cash provided by operations for the year ended
March 31,2007 by the indirect method.
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 33
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 34

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 5.
Compute cash from operations from the following figures:
(i) Profit for the year 2005-06 is a sum of Rs. 10,000 after providing for depreciation of Rs. 2,000.
(ii) The current assets of the business for the year ended March 31,2006 and 2007 are as follows:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 35
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 36
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 37

Question 6.
From the following particulars of Bharat Gas Limited, calculate Cash Flows from Investing Activities. Also show the workings clearly preparing the ledger accounts.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 38
Additional Information
1. Patents were written off to the extent of Rs. 40,000 and some Patents were sold at a profit of Rs. 20,000.
2. 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.
3. On March 31, 2007, 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, 2007.
4. Amartax Ltd. paid Dividend @ 10% on its shares.
5. A plot of Land had been purchased for investment purposes and let out for commercial use and rent received Rs. 30,000.
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 39

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 40

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 41

Question 7.
From the following Balance Sheet of Mohan Ltd. Prepare cash flow Statement:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 42
Additional Information:
Machine Costing Rs. 80,000 on which accumulated depreciation
was Rs. 50,000 was sold for Rs. 20,000.
(Ans. : Cash flow from Operating Activity — Rs. 1,80,000
Cash flow from Investing Activity — Rs.(2,60,000)
Cash flow from Financing Activity — Rs. 20,000)
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 43
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 44
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 45

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 8.
From the following Balance Sheets of Tiger Super Steel Ltd., prepare Cash Flow Statement:
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 46
Additional Information:
Depreciation Charge on Land & Building Rs. 20,000, and Plant Rs. 10,000 during the year.
(Ans.: Cash flow from Operating Activities — Rs. 34,800
Cash flow from Investing Activities — Rs. (50,400)
Cash flow from Financing Activities — Rs. 20,000)
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 47
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 48
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 49

Question 9.
Prepare Cash Flow Statement from the following Information:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 50

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement
Additional Information:
Depreciation Charge on Plant amount of — Rs. 80,000.
(Ans.: Cash Inflow from Operating Activities Rs. 3,80,000 Cash Inflow from Investing Activities — Rs. (2,80,000)
Cash Inflow from Financing Activities — Rs. — NIL)
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 51
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 52
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 53

Question 10.
From the following Information Prepare Cash flow Statements for Yogeta Ltd.
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 54
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 toRs. 60,000.
[Ans.: Cash from Operating Activities — Rs.-2,20,000
Cash from Investing Activities — Rs. (3,50,000)
Cash from Financing Activities — Rs. (80,000)]
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 56

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 11.
Following is the Financial Statement of Garima Ltd. Prepare Cash flow Statements.

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 57

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 58
Answer:
Cash Outflow (use) from Operating Activities Rs. (12,000)
Cash flow from Investing Activities Rs. (1,90,000)
Cash flow from Financing Activities Rs. (1,56,000).]
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 59
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 60
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 61

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

Question 12.
Following as the Balance Sheets of Computer India Ltd.:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 62
Additional Information:
Interest paid on Debenture Rs. 600
[Ans.: Net Cash from Operating Activities — Rs. 2,100
Net Cash from Investing Activities — Rs. 1,000
Net Cash from Financing Activities — Rs.4,900]
Answer:
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 63
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 64
NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement 65

NCERT Solutions for Class 12 Accountancy Chapter 11 Cash Flow Statement

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