CBSE Class 12 Accountancy: An All-Inclusive Cash Flow Statement Manual
Overview
A vital financial tool, the Cash Flow Statement charts the flow of cash inside a company over a certain period. Mastery of this topic is crucial for CBSE Class 12 students since it constitutes a natural component of the syllabus and tests. Analysis of cash flow helps companies to control their liquidity, make wise financial decisions, and assess their financial situation.
This entire blog will cover:
The need of a Cash Flow Statement
The parts of a Cash Flow Statement
Techniques of creating a Cash Flow Statement
Typical corrections and rules of thumb
Exam-oriented questions meant to enable students to be ready
By the time this blog ends, students will be somewhat knowledgeable with Cash Flow Statements and their importance in financial accounting.
Describe a cash flow statement.
A Cash Flow Statement is a financial statement documenting an organization’s cash inflows and expenditures over a given period. It provides information on operational efficiency, investment initiatives, and finance operations, so helping companies to grasp how cash is created and used.
The Cash Flow Statement concentrates just on cash transactions unlike the Profit & Loss Account, which notes income and expenses including non-monetary items. This makes it a very effective instrument for evaluating a company’s financial adaptability and liquidity.
A Cash Flow Statement’s Objectives
Evaluating liquidity helps one to ascertain whether a business has sufficient funds to cover its liabilities.
Track where cash is coming from and going to be used to grasp monetary movements.
3. Decision Making: Advices management on wise financial and investment choices.
4. Analyzing Business Performance: Helps one to compare cash flow patterns across several intervals.
A Cash Flow Statement’s components
Three primary sections comprise a Cash Flow Statement:
1. Operational Activity Cash Flow
Cash transactions linked to the main operations of the company are covered in this part. It entails cash from sales and payments for taxes, rent, and salaries as well as for costs.
Techniques for computing operating activity-based cash flow
Operating cash flow can be determined in two ways:
Using a direct method, lists all payments and cash received.
Starting with the net profit, the indirect method compensates for non-cash items and changes in working capital.
Illustration of indirect method computation:
Under consideration:
Net profit is ₹ 2,50,000.
Add: non-cash costs (Goodwill Written Off = ₹9,000, depreciation = ₹ 20,000)
Less: Profit on Sale of Machinery = ₹ 8,000.
Change with working capital:
Trade Receivables (₹12,000) Increase → Cash Decline
Trade payables rising ₹10,000 → Cash rising
Final Operating Activity Cash Flow: ₹2,76,500
2. Investing Activities’ Cash Flow
Cash obtained or spent from assets like property, machinery, and securities is included in this part.
Here are some instances:
Positive cash flow: Cash inflows
Sale of assets with fixed nature
Selling of investments
Interest and dividend paid (for non-financial corporations)
Negative cash flow, or cash outflows,
buying of fixed assets
Buying investments
Loans handed to other organizations
3. Cash flow originating from financing operations
Transactions involving a company’s financing—such as share issuing, loan borrowing, or debt repayment—are covered in this part.
As an illustration, consider
Cash Flow:
Problem of equity shares
Taking loans
Cash Flow Outflows:
Loan repayment:
Dividend payment methods
Share buybacks
Cash Flow Statement Preparation Techniques
Following Accounting Standard (AS) 3 published by the Institute of Chartered Accountants of India (ICAI), a Cash Flow Statement is generated either using the Direct Method or Indirect Method.
1. Direct Method
More detailed but therefore more complicated, this approach lists actual cash inflows and outflows.
In the case of example:
Cash Flow Using Direct Method from Operating Activities
Customer cash received equals ₹5,00,000.
Less: Two fifty thousand cash paid to suppliers
Less: ₹1,00,000 for running expenses paid with cash
Less: 30,000 paid in taxes.
Operating Activity Net Cash Flow: ₹ 1,20,000
2. Direct Method
Starting with net profit, the indirect approach adjusts for working capital fluctuations and non-cash expenses.
Indirect Method Steps for Preparation:
Starting with Net Profit before Tax
2. List non-cash items (goodwill written off, depreciation).
3. Modify for changes in working capital—that is, either increase or decrease current assets and liabilities.
4. Deductible Tax and Interest Paid
5. Get at Net Cash Flow from Operating Activities.
Typical Corrections in Cash Flow Notes
Essential Questions for the CBSE Class 12 Exams
These often asked questions on Cash Flow Statements can help students get ready:
When would one classify interest as a financial activity?
Arrearous call interest received falls under financial operations.
2. Cash flow statements handle depreciation in what way?
Being a non-cash item, it is added back to Net Profit using the indirect approach.
3. Provide one instance of a funding activity.
Two instances of financing operations are dividend payment and share issuing.
Sort the following into operating, investing, or financing activity:
Dividend a financing business receives → Operating Activity
Dividend received by a non-finance company → Activity of investing
Sales of another company → Activity in Investing
5. List two cash equivalents.
Treasury Notes and Short-Term Savings Accounts.
In essence,
A basic financial tool, the Cash Flow Statement lets companies monitor their cash flow. It offers vital new perspectives on operational effectiveness, financial stability, and investment policies of a business.
Understanding the classification of cash flows, the direct and indirect approaches, and common modifications would help CBSE Class 12 students to score well on tests. Students who practice numerical problems and understand theoretical ideas will be able to boldly answer questions on their board exams pertaining to Cash Flow Statement.
Students can solve prior year question papers to improve their knowledge and access the CBSE Class 12 Accountancy Question Bank for further resources and practice problems.
