Cash Flow Statement Class 12: Indirect Method under AS 3 with Solved Questions

What Cash Flow Statement is about

Weightage: This chapter is in Part B Option I: Financial Statement Analysis, which a student takes instead of Option II (Computerised Accounting). Cash Flow Statement carries 8 of the 80 theory marks.Source: CBSE Accountancy (055) syllabus 2026-27, Part B Option I: Financial Statement Analysis

In real board papers: asked in 2 of the 2 board papers we hold (2026 to 2026), on average 8 marks per paper. See the questions

Key concepts

Objectives, benefits and cash equivalents

NCERT section 6.1, 6.2, 6.3

Objective: to give information about the historical changes in cash and cash equivalents, classified into operating, investing and financing activities, so users can judge the company's ability to generate cash and its need for cash.

Benefits: shows the liquidity and solvency position; explains why profit and cash differ; helps plan for short-term cash needs; helps compare the operating performance of companies (removes the effect of different accounting methods); and shows whether investment and repayment were funded from operations or from new finance.

Cash = cash in hand and demand deposits with banks. Cash equivalents = short-term, highly liquid investments readily convertible into known amounts of cash with an insignificant risk of change in value, usually with a maturity of three months or less from the date of acquisition (such as marketable securities, treasury bills). Movements between cash and cash equivalents are not cash flows.

Worked example

Suppose a company buys a 2-month treasury bill with cash from its bank account. Is this a cash flow? [1 mark]

Try it first, then show the solutionSolution

1. A 2-month treasury bill is a cash equivalent.
2. Moving money from cash to a cash equivalent changes only the composition of cash and cash equivalents.

Answer: No. It is not a cash flow.

Classification of activities

NCERT section 6.5, 6.5.1-6.5.4

Activity	Inflows	Outflows
Operating	Cash sales; receipts from trade receivables; royalties, fees, commission	Payments to suppliers and employees; operating expenses; income tax (unless specifically linked to investing or financing)
Investing	Sale of fixed assets and long-term investments; interest and dividend received (non-financial company)	Purchase of fixed assets, intangible assets and long-term investments; loans and advances made to others
Financing	Issue of shares and debentures; long-term and short-term borrowings (including bank overdraft and cash credit)	Repayment of loans and debentures; buy-back; interest paid; dividend paid (interim, and previous year's proposed)

A bank or other financial enterprise lends and borrows as its main business, so for it interest paid and received, and dividend received, all count as operating activities. Questions in this chapter concern non-financial companies unless stated.

Worked example

Classify for a manufacturing company: (i) purchase of goodwill, (ii) interest received on debentures held as investment, (iii) bank overdraft taken, (iv) income tax paid. [2 marks]

Try it first, then show the solutionSolution

1. (i) Investing outflow.
2. (ii) Investing inflow.
3. (iii) Financing inflow (short-term borrowing).
4. (iv) Operating outflow.

Answer: (i) investing; (ii) investing; (iii) financing; (iv) operating.

Net profit before tax from the balance sheets

NCERT section 6.6.1

Questions usually give only the opening and closing balance of surplus (Statement of Profit and Loss). Rebuild net profit before tax by adding back every appropriation made out of this year's profit:

Net profit before tax = closing surplus − opening surplus + transfer to reserves + interim dividend paid + previous year's proposed dividend paid this year (when shown) + provision for tax made this year.

If the provision for tax made is not given, take the closing balance of provision for tax as the provision made, and the opening balance as the tax paid.

Worked example

Suppose surplus rose from ₹2,00,000 to ₹3,50,000; ₹50,000 was transferred to general reserve; the previous year's proposed dividend of ₹40,000 was paid; and tax provided this year was ₹60,000. Calculate net profit before tax. [2 marks]

Try it first, then show the solutionSolution

1. 1,50,000 + 50,000 + 40,000 + 60,000 = ₹3,00,000.

Answer: ₹3,00,000

Indirect method: operating activities

NCERT section 6.6, 6.6.1

Net profit before tax

• Add non-cash and non-operating charges: depreciation; amortisation of goodwill, patents, preliminary expenses or discount on issue; loss on sale of fixed assets or investments; interest on borrowings and debentures (a financing item).
• Less non-operating incomes: profit on sale of fixed assets or investments; interest and dividend received (investing items).

= Operating profit before working capital changes

• Less increase / add decrease in current assets (inventories, trade receivables, prepaid expenses, accrued income).
• Add increase / less decrease in current liabilities (trade payables, outstanding expenses, income received in advance).

= Cash generated from operations; less income tax paid = net cash from operating activities.

Do not adjust current investments that are cash equivalents, or bank overdraft (financing), in working capital.

Worked example

Suppose (continuing the example above) goodwill of ₹20,000 was amortised, depreciation was ₹70,000, a machine was sold at a profit of ₹10,000, interest received was ₹8,000; trade receivables rose by ₹30,000, prepaid expenses fell by ₹12,000, trade payables fell by ₹15,000, outstanding expenses rose by ₹5,000; tax paid ₹55,000. Calculate cash from operating activities. [4 marks]

Try it first, then show the solutionSolution

1. Operating profit before working capital changes = 3,00,000 + 20,000 + 70,000 − 10,000 − 8,000 = ₹3,72,000.
2. Working capital changes: −30,000 + 12,000 − 15,000 + 5,000 = (28,000); cash generated = ₹3,44,000.
3. Less tax paid ₹55,000: net cash from operating activities = ₹2,89,000.

Answer: ₹2,89,000

Investing and financing activities with workings

NCERT section 6.7

Use the ledger-account idea to find hidden cash flows:

• Fixed assets (at net value): opening + purchases − book value of assets sold − depreciation = closing. Purchases is the balancing figure. With accumulated depreciation shown separately, prepare both the asset (at cost) account and the accumulated depreciation account.
• Investments: opening + purchases − cost of investments sold = closing; sale proceeds = cost ± profit or loss.
• Share capital and debentures: increase = issue (inflow); decrease = redemption or repayment (outflow). Securities premium received is part of the issue inflow. Shares issued to a vendor for assets are a non-cash transaction and appear in neither section.
• Provision for tax: opening + provision made − tax paid = closing.
• Interest on debentures paid = rate × the debentures outstanding for the period.

Worked example

Suppose fixed assets (net) were ₹10,00,000 and ₹12,00,000; depreciation for the year was ₹1,20,000; and machinery with a book value of ₹60,000 was sold for ₹50,000. Find the purchase of fixed assets. [3 marks]

Try it first, then show the solutionSolution

1. Fixed Assets Account (net)

   Dr: Particulars	₹	Cr: Particulars	₹
   To Balance b/d	10,00,000	By Depreciation	1,20,000
   To Bank A/c (purchase, balancing figure)	3,80,000	By Bank A/c (sale)	50,000
   		By Statement of Profit and Loss (loss on sale)	10,000
   		By Balance c/d	12,00,000
   Total	13,80,000	Total	13,80,000

Answer: Purchase ₹3,80,000 (investing outflow); sale ₹50,000 (investing inflow); loss ₹10,000 added back in operating activities.

Peculiar items: dividends, tax, overdraft and marketable securities

NCERT section 6.5.4

• Interim dividend paid this year: financing outflow; add back to find net profit before tax.
• Previous year's proposed dividend, declared and paid this year (AS 4): financing outflow; it was appropriated out of the surplus this year, so add it back too.
• Current year's proposed dividend: not a liability yet; ignore it in this year's statement.
• Income tax: operating outflow; tax paid = opening provision + provision made − closing provision.
• Bank overdraft and cash credit: short-term borrowings, so an increase is a financing inflow and a decrease an outflow (syllabus note).
• Current investments: treated as marketable securities, part of cash and cash equivalents, unless the question says otherwise.
• Extraordinary items are excluded from the syllabus.

Worked example

Suppose bank overdraft rose from ₹40,000 to ₹65,000 and current investments (marketable securities) rose from ₹10,000 to ₹30,000. How are these shown? [2 marks]

Try it first, then show the solutionSolution

1. Bank overdraft: ₹25,000 inflow under financing activities.
2. Marketable securities: part of cash and cash equivalents; their rise is part of the net increase in cash, not a separate flow.

Answer: Financing inflow ₹25,000; marketable securities included in cash and cash equivalents.

Cash Flow Statement in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Classification of Cash Flow Activities
• Cash Flow from Operating Activities (Indirect Method)
• Cash Flow from Investing and Financing Activities

Cash Flow Statement: key facts

Net profit before tax

Change in surplus + transfer to reserves + interim dividend + previous year's proposed dividend paid + provision for tax made

Operating profit before working capital changes

NPBT + non-cash/non-operating charges − non-operating incomes

Working capital adjustment

Current asset: increase subtract, decrease add. Current liability: increase add, decrease subtract

Net cash from operating activities

Cash generated from operations − income tax paid

Tax paid

Opening provision + provision made − closing provision

Fixed assets purchased (net values)

Closing − opening + depreciation + book value of assets sold

Check

A + B + C = closing cash and cash equivalents − opening cash and cash equivalents

How the board asks Cash Flow Statement

The question patterns to expect, and the method that works for each.

Tricks to remember Cash Flow Statement

Short memory aids. Say each one aloud once, then use it on a question the same day.

• CA up, cash down; CL up, cash up

  Increase in a current asset uses cash; increase in a current liability saves cash.

  Use it when: Working capital adjustments.

• Received → investing; paid → financing

  For a non-financial company, interest and dividends received are investing; paid are financing.

  Use it when: Classification.

• Rebuild the profit

  Change in surplus + reserves + dividends + tax provision = NPBT.

  Use it when: First line of the statement.

• Overdraft finances, securities are cash

  Bank overdraft: financing. Marketable securities: cash equivalents.

  Use it when: Syllabus notes.

Cash Flow Statement: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In the board paper this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Cash Flow Statement

The slips examiners see most often, and what to write instead.

• ✗Mistake: Starting operating activities from closing surplus

  Treating the balance as profit.

  ✓Do this: Use the change in surplus plus all appropriations (reserves, dividends, tax provision).

  Usually costs: 1-2 marks.

• ✗Mistake: Showing dividend received under operating activities for a company

  It is income.

  ✓Do this: For a non-financial company it is investing; also deduct it from net profit.

  Usually costs: 1 mark.

• ✗Mistake: Adjusting bank overdraft in working capital

  It is a current liability.

  ✓Do this: Bank overdraft and cash credit are short-term borrowings: financing activities.

  Usually costs: 1 mark.

• ✗Mistake: Forgetting to add back interest on debentures

  It is a normal expense in the P&L.

  ✓Do this: Add it back in operating activities and show it as a financing outflow.

  Usually costs: 1 mark in each section.

• ✗Mistake: Recording a non-cash issue of shares as a cash inflow

  Share capital rose.

  ✓Do this: Exclude shares issued to vendors or as bonus; only cash issues count.

  Usually costs: 1 mark.

• ✗Mistake: Treating current investments as investing activities

  The word "investments".

  ✓Do this: Current investments are marketable securities (cash equivalents) unless specified.

  Usually costs: 1 mark.

NCERT exercise guide: Cash Flow Statement

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Cash Flow Statement: previous year questions

• Asked in 2 of the 2 board papers we hold (2026 to 2026), on average 8 marks per paper; 8 questions in all, counting OR alternatives. In 4 of 4 sample papers.

Counted from the real papers on our previous year papers page, not estimated. Average marks are over every board paper we hold, with an OR pair counted once. Chapter tags are ours.

Solved board questions from Cash Flow Statement

Real questions from recent papers. Try each one first, then open our step-by-step solution with marks per step.

Every Cash Flow Statement question, by year

Practice questions on Cash Flow Statement

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Under the indirect method, depreciation is:
   (a) deducted from net profit
   (b) added to net profit
   (c) shown under investing activities
   (d) ignored

   Hint

   Non-cash charge.

   Answer

   (b) added to net profit

2. Q2 · 1 mark · MCQBoard level

   Bank overdraft taken during the year is shown as:
   (a) operating inflow
   (b) investing inflow
   (c) financing inflow
   (d) part of cash and cash equivalents

   Hint

   Syllabus note.

   Answer

   (c) financing inflow

3. Q3 · 3 marks · Short answerBoard level

   State any three objectives or benefits of a Cash Flow Statement.

   Hint

   Liquidity, profit vs cash, planning.

   Answer

   Shows sources and uses of cash; explains the difference between profit and cash; helps judge liquidity and plan cash needs (also inter-firm comparison of operating performance).

4. Q4 · 3 marks · Short answerBoard level

   Classify for a non-financial company: (i) purchase of a patent; (ii) dividend paid; (iii) cash received from customers; (iv) interest received on a loan given; (v) redemption of preference shares; (vi) income tax paid.

   Hint

   Main business, long-term assets, sources of funds.

   Answer

   (i) Investing; (ii) financing; (iii) operating; (iv) investing; (v) financing; (vi) operating.

5. Q5 · 3 marks · Short answerHarder board level

   Suppose surplus rose from ₹1,00,000 to ₹2,20,000 after a transfer of ₹30,000 to general reserve and an interim dividend of ₹25,000; provision for tax made ₹45,000. Calculate net profit before tax.

   Hint

   Add back every appropriation.

   Answer

   1,20,000 + 30,000 + 25,000 + 45,000 = ₹2,20,000.

6. Q6 · 4 marks · Short answerHarder board level

   Suppose machinery at cost was ₹5,00,000 and ₹6,50,000; accumulated depreciation ₹1,00,000 and ₹1,30,000. Machinery costing ₹80,000 (accumulated depreciation ₹30,000) was sold for ₹40,000. Calculate depreciation for the year, machinery purchased and the loss on sale.

   Hint

   Two accounts: cost and accumulated depreciation.

   Answer

   Purchases = 6,50,000 + 80,000 − 5,00,000 = ₹2,30,000. Depreciation = 1,30,000 + 30,000 − 1,00,000 = ₹60,000. Loss = 80,000 − 30,000 − 40,000 = ₹10,000.

7. Q7 · 3 marks · Short answerHarder board level

   Suppose 10% debentures were ₹4,00,000 on 1st April 2025 and ₹6,00,000 on 31st March 2026, the new debentures being issued on 1st October 2025 at a premium of 5%. Calculate cash flow from financing activities from this information.

   Hint

   Interest for six months on the new ones.

   Answer

   Issue: 2,00,000 × 1.05 = ₹2,10,000 inflow. Interest: 4,00,000 × 10% + 2,00,000 × 10% × 6/12 = ₹50,000 outflow. Net ₹1,60,000.

8. Q8 · 3 marks · Short answerHOTS / competency

   Suppose a company with net profit before tax of ₹5,00,000 has cash used in operating activities. What changes in working capital could explain this? Give a numerical illustration.

   Hint

   Receivables and inventory build-up.

   Answer

   Large increases in receivables and inventory, or a fall in payables. For example: profit 5,00,000 + depreciation 50,000 − increase in receivables 4,00,000 − increase in inventory 2,50,000 − tax 1,20,000 = (2,20,000).

9. Q9 · 1 mark · Assertion-reasonHOTS / competency

   Assertion (A): The current year's proposed dividend is not shown in the current year's Cash Flow Statement.
   Reason (R): A proposed dividend becomes a liability only when shareholders declare it.
   (a) Both true and R explains A (b) Both true, R does not explain A (c) A true, R false (d) A false, R true

   Hint

   AS 4 and the syllabus note.

   Answer

   (a)

10. Q10 · 1 mark · MCQHarder board level

    Profit on sale of investments of ₹20,000 is treated in the indirect method as:
    (a) added to net profit and shown under financing
    (b) deducted from net profit; sale proceeds under investing
    (c) added to net profit; sale proceeds under operating
    (d) ignored

    Hint

    Non-operating income.

    Answer

    (b)

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Which method of preparing operating cash flow is in the syllabus?Show answer

   The indirect method only (AS 3 Revised).

2. 2.What maturity makes an investment a cash equivalent?Show answer

   Usually three months or less from the date of acquisition.

3. 3.Where is income tax paid shown?Show answer

   Operating activities, unless specifically identified with investing or financing.

4. 4.How is the previous year's proposed dividend paid this year treated?Show answer

   Financing outflow, and added back to compute net profit before tax.

5. 5.How is a decrease in trade payables treated?Show answer

   Deducted in operating activities.

6. 6.Where is purchase of goodwill shown?Show answer

   Investing outflow.

7. 7.What is the formula for tax paid?Show answer

   Opening provision + provision made − closing provision.

8. 8.Is the issue of bonus shares a cash flow?Show answer

   No; it is a non-cash transaction.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you define cash equivalents?
• ☐Can you classify twenty items into the three activities?
• ☐Can you rebuild NPBT from the change in surplus?
• ☐Can you add back depreciation, amortisation, losses and interest?
• ☐Can you deduct profits on sale and interest or dividend received?
• ☐Can you make working capital adjustments with correct signs?
• ☐Can you compute tax paid?
• ☐Can you find fixed assets purchased from an account?
• ☐Can you treat bank overdraft, marketable securities and proposed dividend correctly?
• ☐Can you reconcile A + B + C with the change in cash?

Cash Flow Statement: frequently asked questions