Cash Flow Statement: ISC Class 12 Accounts Notes and Solved Problems (AS-3)

What Cash Flow Statement is about

Weightage: Cash Flow Statement carries 8 of the 80 theory marks in Section B (Management Accounting). Candidates answer either Section B or Section C (20 marks each), after the compulsory 60-mark Section A.Source: CISCE ISC Accountancy (Accounts) syllabus, examination year 2027, distribution of marks

Key concepts

Cash and cash equivalents

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: generally with an original maturity of three months or less from the date of acquisition. The ISC scope lists cash, bank, short-term investments and marketable securities.

Movements between cash and cash equivalents (for example depositing cash in a 60-day deposit) are not cash flows. A bank deposit with maturity of more than three months is an investing item.

Worked example

Suppose a company (i) buys government securities, (ii) places money in a 6-month bank deposit, (iii) redeems liquid mutual fund units bought last month, (iv) withdraws a 60-day deposit. Which are cash outflows from investing activities? [1 mark]

Try it first, then show the solutionSolution

1. (i) and (ii) are investments that are not cash equivalents: investing outflows.
2. (iii) and (iv) involve cash equivalents; converting them to cash is not a cash flow.

Answer: (i) and (ii).

Classification of activities (manufacturing company)

Operating	Investing	Financing
Cash from sale of goods and services; royalties, fees, commissions	Purchase and sale of PPE and intangible assets	Issue of shares (with premium) and debentures (net of discount)
Payments to suppliers and employees	Purchase and sale of shares, debentures and long-term investments of other companies	Redemption of preference shares and debentures
Income tax paid (unless specifically identified with investing or financing)	Loans and advances given and their repayment	Long-term and short-term borrowings (bank overdraft, cash credit, short-term loans) taken or repaid
	Interest and dividend received	Interest paid; interim and final dividend paid; share issue expenses and underwriting commission paid

For a financial enterprise interest and dividends would be operating, but the ISC syllabus is limited to manufacturing companies.

Worked example

Suppose a manufacturer buys 5,000 7% debentures of ₹100 each of another company on 1st April and receives ₹35,000 interest on them on 31st March. How are these shown? [1 mark]

Try it first, then show the solutionSolution

1. Purchase of ₹5,00,000: investing outflow.
2. Interest received ₹35,000: investing inflow (and deducted from profit in operating activities as non-operating income).

Answer: ₹5,00,000 outflow and ₹35,000 inflow, both under investing activities.

Operating activities: the indirect method

Step 1: Net profit before tax (working note): closing surplus − opening surplus + transfers to reserves + interim dividend paid + previous year's proposed dividend paid + provision for tax made this year (and any other appropriations).

Step 2: Adjust for non-cash and non-operating items

• Add: depreciation and amortisation, goodwill or patents written off, loss on sale of assets or investments, discount or loss on issue of debentures written off, interest on borrowings (finance cost), provision for doubtful debts if treated as a charge.
• Less: profit on sale of assets or investments, interest and dividend received.

Result: operating profit before working capital changes.

Step 3: Working capital changes: increase in current assets (other than cash) is deducted, decrease added; increase in current liabilities (other than items classified as financing, such as bank overdraft, and provision for tax and dividend) is added, decrease deducted.

Step 4: Less income tax paid (from the Provision for Tax A/c).

Worked example

Suppose a company's net profit before tax is ₹12,00,000. Inventory fell by ₹40,000, trade payables fell by ₹15,000, and tax of ₹3,60,000 was paid. There are no non-cash items. Find net cash from operating activities. [2 marks]

Try it first, then show the solutionSolution

1. 12,00,000 + 40,000 (decrease in inventory) − 15,000 (decrease in payables) = ₹12,25,000 cash generated.
2. Less tax paid 3,60,000.

Answer: ₹8,65,000.

Hidden adjustments: asset accounts, tax and dividends

Many figures must be found from working notes:

• PPE: if shown at net value, use net values plus depreciation; if shown at cost with accumulated depreciation, prepare the asset account at cost and an Accumulated Depreciation A/c. Depreciation charged = closing accumulated depreciation − opening + depreciation on assets sold. An asset's book value may stay the same although one was purchased, because depreciation offset the purchase.
• Tax paid = opening provision + provision made this year − closing provision (from the Provision for Tax A/c); never "tax provided".
• Dividend paid = proposed dividend of the previous year (assumed approved) + interim dividend − closing unpaid (unclaimed) dividend + opening unpaid dividend.
• Debentures issued at a discount: inflow = issue price, not face value; discount written off is added back in operating activities.
• Interest on debentures: added back in operating; the amount actually paid (interest − outstanding interest) is a financing outflow.
• Non-cash transactions (shares issued to a vendor for a machine) are excluded altogether.

Worked example

Suppose 8% debentures rose from ₹2,00,000 to ₹6,00,000 during the year; the new debentures were issued at a discount of 4%. What is the cash inflow? [1 mark]

Try it first, then show the solutionSolution

1. Face value issued = ₹4,00,000; cash received = 4,00,000 × 96% = ₹3,84,000. The discount of ₹16,000 is not a cash flow.

Answer: ₹3,84,000 under financing activities.

Investing and financing activities in practice

Investing: record the cash paid for assets (from the asset account), the cash received on sale (book value ± profit or loss), purchase and sale of non-current investments, and interest and dividend received.

Financing: record share issues including premium, debenture issues net of discount, redemptions, interest paid on all borrowings, interim dividend and previous year's proposed dividend (if approved), changes in bank overdraft, cash credit and short-term loans, and share issue expenses.

The statement ends with: net increase or decrease in cash and cash equivalents + opening balance = closing balance. Always write the heading with the period ("for the year ended 31st March 20XX").

Worked example

Suppose a company issued 20,000 equity shares of ₹10 each at a premium of ₹1, paid share issue expenses of ₹4,000, and its bank overdraft fell from ₹60,000 to ₹45,000. Show the financing items. [2 marks]

Try it first, then show the solutionSolution

1. Issue of shares: 20,000 × 11 = ₹2,20,000 inflow.
2. Share issue expenses ₹4,000 outflow; decrease in bank overdraft ₹15,000 outflow.

Answer: Net from these items = 2,20,000 − 4,000 − 15,000 = ₹2,01,000 inflow.

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

• Cash Flow from Operating Activities: Indirect Method
• Investing and Financing Activities and the Full Cash Flow Statement
• Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows

Cash Flow Statement: key facts

Net profit before tax

Change in surplus + transfers to reserves + interim dividend + previous year's proposed dividend + tax provided this year

Tax paid

Opening provision + provided this year − closing provision

Depreciation charged

Closing accumulated depreciation − opening + accumulated depreciation on assets sold

Purchase of asset

Closing cost − opening cost + cost of assets sold

Net change in cash

Operating + investing + financing = closing − 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.

• Indirect method: P-A-W-T

  Profit before tax → Add back/deduct non-cash and non-operating items → Working capital changes → Tax paid.

  Use it when: Operating activities.

• Manufacturing rule: "Received = Investing, Paid = Financing"

  Interest and dividend received go to investing; interest and dividend paid to financing.

  Use it when: Classification questions.

• Current assets up, cash down

  An increase in a current asset uses cash (deduct); an increase in a current liability saves cash (add).

  Use it when: Working capital changes.

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 A style)

Read the situation, then answer every part. In the board paper this is a 6-mark question split into 2 + 2 + 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: Tax provided taken as tax paid; unpaid dividend ignored

  CISCE examiners' comments, 2024: "Wrote tax provided as tax paid"; "Ignored unclaimed dividend when computing dividend paid".

  ✓Do this: Prepare the Provision for Tax A/c; deduct closing unpaid dividend from dividend declared.

  Usually costs: 1 mark each.

• ✗Mistake: Interest on debentures not adjusted; depreciation not found

  CISCE examiners' comments, 2024: "Did not record interest on debentures as non-operating expense and financing outflow"; "Could not calculate depreciation charged on Plant & Machinery"; "Did not mention the period of the Cash Flow Statement".

  ✓Do this: Add back interest in operating and show it paid in financing; prepare asset and accumulated depreciation accounts; write the dated heading.

  Usually costs: 1-2 marks.

• ✗Mistake: Debenture issue at a discount shown at face value

  CISCE examiners' comments, 2024: "Did not account for discount on issue of debentures"; CISCE examiners' comments, 2025: "Showed issue of 4% debentures as ₹15,00,000 instead of ₹5,00,000; heading with date missing."

  ✓Do this: Inflow = only the new issue, at issue price; discount written off is added back in operating activities.

  Usually costs: 1 mark.

• ✗Mistake: Missing working notes and hidden adjustments

  CISCE examiners' comments, 2025: "Did not prepare Plant & Machinery A/c as working note, so depreciation wrong."; "Interest on debentures calculated incorrectly; interest on investment omitted from non-operating income."

  ✓Do this: Write working notes for NPBT, each asset, tax and interest before the statement.

  Usually costs: 1-2 marks.

• ✗Mistake: Wrong reason for unchanged asset value

  CISCE examiners' comments, 2024: "Gave sale/purchase as reason for unchanged book value instead of depreciation".

  ✓Do this: When an asset was bought but its net book value is unchanged, the explanation is depreciation charged during the year.

  Usually costs: 1 mark.

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

   Dividend received by a manufacturing company is classified as:
   (a) operating
   (b) investing
   (c) financing
   (d) cash equivalent

   Hint

   Manufacturing rule.

   Answer

   (b)

2. Q2 · 1 mark · Very short answerBoard level

   Net decrease in cash and cash equivalents was ₹13,000 and closing balance ₹4,000. Find the opening balance.

   Hint

   Opening − 13,000 = 4,000.

   Answer

   ₹17,000.

3. Q3 · 1 mark · Very short answerBoard level

   Is an increase in bank overdraft an operating or a financing activity under the ISC syllabus?

   Hint

   Short-term borrowings.

   Answer

   Financing activity (short-term borrowing taken).

4. Q4 · 2 marks · Short answerHarder board level

   Surplus in Statement of P&L rose from ₹1,00,000 to ₹1,60,000. Transfer to general reserve ₹20,000; tax provided ₹45,000; previous year's proposed dividend ₹25,000 paid. Find net profit before tax.

   Hint

   Add back appropriations.

   Answer

   60,000 + 20,000 + 45,000 + 25,000 = ₹1,50,000.

5. Q5 · 2 marks · Short answerHarder board level

   Machinery (net): opening ₹4,00,000; closing ₹5,20,000; depreciation ₹60,000; a machine of book value ₹30,000 sold for ₹25,000. Find the purchase of machinery.

   Hint

   Machinery A/c at net value.

   Answer

   5,20,000 + 60,000 + 30,000 − 4,00,000 = ₹2,10,000.

6. Q6 · 2 marks · Short answerHarder board level

   Interest on 10% debentures of ₹5,00,000 is ₹50,000, of which ₹12,500 is outstanding at the year-end. Show the treatment.

   Hint

   Added back in full; paid in financing.

   Answer

   Add back ₹50,000 in operating activities; show interest paid ₹37,500 under financing activities.

7. Q7 · 1 mark · Very short answerHOTS / competency

   A machine of ₹2,00,000 was acquired by issuing equity shares to the vendor. Show its effect on the Cash Flow Statement.

   Hint

   Cash?

   Answer

   None: it is a non-cash transaction and is excluded from all three activities.

8. Q8 · 2 marks · Short answerHOTS / competency

   Explain why an Adjusted Profit and Loss Account is not acceptable for operating activities in the ISC paper, and what you show instead.

   Hint

   AS-3 format.

   Answer

   AS-3 requires the statement format starting from net profit before tax with adjustments shown in the statement; the syllabus says the Adjusted P&L A/c is not acceptable and that NPBT must be shown as a working note.

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 for operating activities in ISC?Show answer

   Indirect method only.

2. 2.Interest paid by a manufacturing company?Show answer

   Financing activity.

3. 3.Current year's proposed dividend in the Cash Flow Statement?Show answer

   Ignored (contingent liability).

4. 4.Bank overdraft change?Show answer

   Financing activity (short-term borrowing).

5. 5.Is NPBT shown in a working note?Show answer

   Yes, as the syllabus requires.

Quick revision checklist

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

• ☐NPBT + non-cash/non-operating charges − non-operating incomes ± working capital − tax paid = CFO.
• ☐Received interest/dividend: investing; paid: financing.
• ☐Previous year's proposed dividend paid; current year's ignored.
• ☐Debentures at discount: inflow at issue price.
• ☐Bank overdraft, cash credit: financing.
• ☐Opening cash + net change = closing cash.

Cash Flow Statement: frequently asked questions