AccountsISC Class 12 · Cash Flow Statement

Cash Flow Statement: Meaning, Importance and Classification, ISC Class 12 Accounts

Updated 17 October 2026 · Draft, not yet fact-checked

A Cash Flow Statement (AS-3, revised) reports the inflows and outflows of cash and cash equivalents of a company during a period, classified under operating, investing and financing activities. Cash and cash equivalents mean cash, bank, short-term investments and marketable securities. The ISC syllabus covers it only for manufacturing companies and requires the indirect method for operating activities.

Every cash flow is sorted into operating, investing or financing, and together they explain the change in cash and equivalents; transfers within cash are not fl

Illustration drawn for QuestionBuddy.

Understand Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows

Why a Cash Flow Statement? The Statement of Profit and Loss reports profit, which includes non-cash items and credit transactions. A business can show a profit and still run short of cash. The Cash Flow Statement (CFS) shows where cash came from and where it went, based on Accounting Standard 3 (revised) of the Institute of Chartered Accountants of India. The ISC syllabus covers it only for manufacturing companies, and calculates operating cash flow by the indirect method only.

Cash and cash equivalents. As the syllabus states: cash, bank, short-term investments and marketable securities. The CFS explains the change in this total between the opening and closing dates. Movement between items inside this total, such as depositing cash into the bank, is not a cash flow.

Importance. It shows the sources and uses of cash, helps judge liquidity and the ability to pay interest and dividends, helps in cash planning, and explains why profit and cash differ.

The three classes of activity

Activity	Meaning	Typical items (from the syllabus)
Operating	Principal revenue-producing activities of the company	Net profit before tax adjusted for non-cash and non-operating items and for changes in working capital; tax paid
Investing	Acquisition and disposal of long-term assets and investments	Cash purchase or sale of PPE and intangible assets; purchase and sale of shares, debentures or long-term investments of other companies; loans and advances given or repaid; interest and dividend received on those investments and loans
Financing	Changes in the size and make-up of owners' capital and borrowings	Issue of shares at par or premium; issue of debentures at par, premium or discount; redemption of preference shares and debentures at par; interest paid on borrowings; dividend paid; taking or repaying long-term and short-term borrowings (bank overdraft, cash credit, short-term loan); share issue expenses and underwriting commission paid

Where the awkward items go. Interest *paid* on borrowings is financing. Interest and dividend *received* on investments or loans given are investing. Dividend *paid* to shareholders is financing. Tax paid is shown in operating activities, after cash generated from operations.

Non-cash transactions do not appear in the CFS. For example, buying machinery in exchange for debentures changes no cash, so it is left out of investing and financing; the interest later paid on those debentures is a financing outflow. Similarly, provision for tax, depreciation, amortisation and transfers to reserves are non-cash.

Limits stated in the syllabus. Extraordinary items, refund of tax and anything about Capital Reserve are not required. The working note for net profit before tax must be shown, and an adjusted Profit and Loss Account is not accepted for the operating section. The next two topic pages deal with computing the operating section and with investing and financing in a full statement.

Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows: key facts

Cash and cash equivalents: Cash in hand
Bank balance
Short-term investments
Marketable securities; Syllabus list.
Net change in cash: Operating activities
Investing activities
Financing activities; Net of all three equals closing less opening cash and cash equivalents.
Closing cash and cash equivalents: Opening cash and cash equivalents | add Net increase or less Net decrease; Must equal the Balance Sheet figure.
Interest and dividend rule: Paid on borrowings and shares: financing | Received on investments and loans given: investing; ISC classification.

How to answer Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows questions

Classification questions are quick marks. Ask what the transaction does to the company.

1Is it part of the main business of manufacturing and selling? Operating.
2Is it buying or selling a long-term asset, an investment, or lending money? Investing.
3Is it raising or repaying owners' or lenders' money, or paying a return to them? Financing.
4Did cash and cash equivalents actually change? If not, it is not a cash flow.
5Add the three nets; compare with the change in cash and cash equivalents.

Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows in real life

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

Profit is not the same as cash

Suppose a furniture company earns a profit of ₹1,00,000 in a year but customers owe it ₹3,50,000 more than a year ago, and it spent ₹50,000 more on stock. Depreciation of ₹1,00,000 was charged.

What is its cash from operations before tax, if there are no other adjustments?

Try it first, then show the solutionSolution

Start from profit: 1,00,000.
Add back depreciation (non-cash): 1,00,000 + 1,00,000 = 2,00,000.
Less higher debtors 3,50,000 and higher stock 50,000: 2,00,000 − 4,00,000 = −2,00,000.

Answer: A cash outflow of ₹2,00,000 from operations, although the company reported a profit.

Memory hook: Profit counts promises; cash counts money.

Tricks to remember Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows

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

O-I-F
Operating (running the business), Investing (buying and selling long-term assets), Financing (raising and repaying capital).
Use it when: Three headings.
Paid is Financing, Received is Investing
Interest and dividend paid belong to financing; interest and dividend received belong to investing.
Use it when: The commonest classification error.
Cash to cash does not count
Cash deposited in bank, or buying a cash equivalent, is not a cash flow.
Use it when: Spotting non-flows.

Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Classifying dividend received · 1 mark · MCQBoard level

A manufacturing company receives dividend on shares it holds in another company. In its Cash Flow Statement this is shown under:
(a) operating activities
(b) investing activities
(c) financing activities
(d) it is not shown

Try it first, then show the solutionSolution

Under the ISC classification, interest and dividend received on investments are investing inflows.

Answer: (b) investing activities

Example 2: Classify the transactions · 3 marks · Short answerBoard level

State whether each transaction is an operating, investing or financing activity, or has no effect on cash and cash equivalents: (i) issue of equity shares for cash; (ii) purchase of machinery for cash; (iii) interest paid on debentures; (iv) cash deposited in the bank; (v) proceeds of sale of long-term investments; (vi) redemption of preference shares at par; (vii) cash received from sale of scrap by a manufacturing company (a regular activity); (viii) interest received on a loan given to another company. (3 marks)

Try it first, then show the solutionSolution

(i) Financing. (ii) Investing. (iii) Financing. (iv) No effect: both are cash and cash equivalents.
(v) Investing. (vi) Financing. (vii) Operating, as sale of scrap forms part of Revenue from operations in the syllabus.
(viii) Investing, as interest on loans and advances given.

Answer: (i) Financing; (ii) Investing; (iii) Financing; (iv) No effect; (v) Investing; (vi) Financing; (vii) Operating; (viii) Investing.

Example 3: Cash and cash equivalents · 3 marks · Short answerHarder board level

Opening and closing balances of Nimbus Ltd. were: cash in hand ₹25,000 and ₹40,000; bank balance ₹1,10,000 and ₹1,35,000; marketable securities ₹30,000 and ₹20,000. Net cash from operating activities was ₹1,40,000 and net cash used in investing activities ₹95,000. Find the opening and closing cash and cash equivalents, the net increase or decrease, and the cash flow from financing activities. (3 marks)

Try it first, then show the solutionSolution

Opening = 25,000 + 1,10,000 + 30,000 = ₹1,65,000. Closing = 40,000 + 1,35,000 + 20,000 = ₹1,95,000.
Net increase = 1,95,000 − 1,65,000 = ₹30,000.
Financing = 30,000 − 1,40,000 + 95,000 = −₹15,000.

Answer: Opening ₹1,65,000; closing ₹1,95,000; net increase ₹30,000; financing activities = net cash used of ₹15,000.

Example 4: Net cash by activity and closing balance · 6 marks · Long answerHarder board level

Net cash from operating activities of Obsidian Ltd. is ₹1,50,000. Other cash transactions for the year: machinery purchased ₹2,00,000; old machinery sold ₹50,000; interest received on investments ₹12,000; long-term investments purchased ₹80,000; shares issued at par ₹1,00,000 and at a premium of ₹50,000 more; bank loan repaid ₹40,000; interest paid on the loan ₹15,000; dividend paid ₹25,000; 10% debentures issued at par ₹1,00,000. Opening cash and cash equivalents were ₹78,000. Prepare the investing and financing sections and find the closing balance. (6 marks)

Try it first, then show the solutionSolution

Investing: −2,00,000 + 50,000 + 12,000 − 80,000 = −₹2,18,000.
Financing: 1,00,000 + 50,000 − 40,000 − 15,000 − 25,000 + 1,00,000 = ₹1,70,000.
Net change = 1,50,000 − 2,18,000 + 1,70,000 = ₹1,02,000.
Closing = 78,000 + 1,02,000 = ₹1,80,000.

Answer:

Particulars	₹
Net cash from operating activities	1,50,000
Cash flows from investing activities
Purchase of machinery	(2,00,000)
Sale of old machinery	50,000
Interest received on investments	12,000
Purchase of long-term investments	(80,000)
Net cash used in investing activities	(2,18,000)
Cash flows from financing activities
Issue of shares at par and premium	1,50,000
Repayment of bank loan	(40,000)
Interest paid	(15,000)
Dividend paid	(25,000)
Issue of 10% debentures	1,00,000
Net cash from financing activities	1,70,000
Net increase in cash and cash equivalents	1,02,000
Add: Opening cash and cash equivalents	78,000
Closing cash and cash equivalents	1,80,000

Example 5: Profit but low cash · 3 marks · Short answerHOTS / competency

Pearl Ltd. earned a net profit before tax of ₹5,00,000 after charging depreciation of ₹1,00,000. Trade receivables rose by ₹3,50,000, inventories rose by ₹2,00,000 and trade payables rose by ₹50,000. There are no other adjustments. Find cash generated from operations before tax and explain to the owners why cash is so low in a profitable year. (3 marks)

Try it first, then show the solutionSolution

5,00,000 + 1,00,000 (depreciation) = 6,00,000.
Less increase in receivables 3,50,000 and inventories 2,00,000; add increase in payables 50,000: 6,00,000 − 3,50,000 − 2,00,000 + 50,000 = ₹1,00,000.
Profit was locked in unpaid sales and unsold stock, which are not cash.

Answer: Cash generated from operations = ₹1,00,000, against a profit of ₹5,00,000, because ₹5,50,000 was tied up in higher debtors and stock.

Where students lose marks in Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows

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

Mistake: Showing interest paid under operating activities
Seeing it as an expense.
Wrong working
Operating: interest paid (20,000)
Right working
Financing: interest paid (20,000)
Do this: Under the ISC classification paid is financing; received is investing.
Usually costs: 1-2 marks.
Mistake: Treating a bank deposit as a cash flow
Two accounts are involved.
Wrong working
Cash deposited in bank 50,000 shown in investing
Right working
No entry: both items are cash and cash equivalents
Do this: Only transactions that change the total are cash flows.
Usually costs: 1 mark.
Mistake: Showing a non-cash purchase as an investing outflow
Machinery was bought, so cash must have left.
Wrong working
Purchase of machinery (9,00,000) when paid in debentures
Right working
Not shown; no cash moved
Do this: Check how the asset was paid for.
Usually costs: 1-2 marks.
Mistake: Opening with profit after tax
Starting at the last line of the P&L.
Wrong working
Start with 3,60,000 (PAT)
Right working
Start with net profit before tax, shown in a working note
Do this: Add the provision for tax back before starting.
Usually costs: 1-2 marks.

Exam tips

Write the three headings in full and the net total at the end of each.
Show the opening and closing cash and cash equivalents and agree them with the Balance Sheet.
Give a brief reason for each classification when the question asks you to justify.
Write brackets for outflows consistently.

Practice questions on Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows

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

Q1 · 1 mark · MCQBoard level
Which of the following is a financing activity?
(a) Purchase of land for cash
(b) Redemption of debentures at par
(c) Interest received on investments
(d) Sale of old plant for cash
Hint
It changes the lenders' or owners' funds.
Answer
(b) Redemption of debentures at par
Q2 · 3 marks · Short answerBoard level
State, with reasons, the activity under which each appears in a Cash Flow Statement: (i) cash sale of furniture; (ii) payment of interim dividend; (iii) loan given to a supplier; (iv) share issue expenses paid; (v) cash discount allowed to customers on sales. (3 marks)
Hint
Look at what the transaction changes.
Answer
(i) Investing: disposal of PPE. (ii) Financing: dividend paid. (iii) Investing: loans and advances given. (iv) Financing: share issue expenses. (v) Operating: it is part of regular sales activity.
Q3 · 3 marks · Short answerHarder board level
Cash in hand ₹18,000 and ₹27,000, bank balance ₹92,000 and ₹1,05,000, marketable securities ₹40,000 and ₹25,000 at the beginning and end of the year. A fixed deposit of ₹1,00,000 maturing after 2 years is the same at both dates. Calculate the opening and closing cash and cash equivalents and the net change. (3 marks)
Hint
The two-year deposit is not a cash equivalent.
Answer
Opening ₹1,50,000; closing ₹1,57,000; net increase ₹7,000. The deposit is excluded.
Q4 · 6 marks · Long answerHarder board level
Mercury Ltd.'s opening cash and cash equivalents were ₹2,10,000. Net cash from operating activities was ₹3,40,000. Other transactions: machinery purchased ₹4,50,000; long-term investments sold ₹1,20,000; interest received on investments ₹18,000; equity shares issued at par ₹2,00,000 and premium ₹40,000; debentures redeemed at par ₹1,50,000; interest paid ₹36,000; dividend paid ₹60,000. Prepare the statement from the operating total onwards and find the closing balance. (6 marks)
Hint
Investing and financing nets first.
Answer
Investing = −4,50,000 + 1,20,000 + 18,000 = −₹3,12,000. Financing = 2,00,000 + 40,000 − 1,50,000 − 36,000 − 60,000 = −₹6,000. Net change = 3,40,000 − 3,12,000 − 6,000 = ₹22,000. Closing = 2,10,000 + 22,000 = ₹2,32,000.
Q5 · 3 marks · Short answerHOTS / competency
The accountant of Orbit Ltd. says: "Depreciation of ₹60,000 is added back in the Cash Flow Statement, so the company received ₹60,000 in cash." Net profit before tax is ₹2,80,000 after charging depreciation. Comment and state the figure of profit before working capital changes. (3 marks)
Hint
What happened to cash when depreciation was charged?
Answer
Depreciation is a non-cash charge; no cash moved, so the add-back only reverses the deduction made in arriving at profit. Profit before working capital changes = 2,80,000 + 60,000 = ₹3,40,000.

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.Which AS governs the Cash Flow Statement?Show answer
Accounting Standard 3 (revised).
2.Which method is used for operating activities in ISC?Show answer
The indirect method only.
3.Interest paid: which activity?Show answer
Financing.
4.Interest received on investments: which activity?Show answer
Investing.
5.Does a Cash Flow Statement cover non-manufacturing companies in ISC?Show answer
No; the syllabus is for manufacturing companies only.

Cash Flow Statement: Meaning, AS-3 and Classification of Cash Flows: frequently asked questions

What is the difference between cash and cash equivalents?

Cash means cash in hand and bank; the syllabus adds short-term investments and marketable securities as equivalents.

Where is tax paid shown?

In operating activities, after cash generated from operations.

Why are non-cash transactions ignored?

The statement reports flows of cash and cash equivalents; if no cash moves, there is nothing to report.

Is Capital Reserve tested?

No. The syllabus excludes transactions pertaining to Capital Reserve.