CBSE Class 12 Accountancy Chapter 6 Cash Flow Statement Notes: Download PDF

The Cash Flow Statement is a cornerstone of Class 12 Accountancy, essential for both theoretical understanding and practical application. By mastering its concepts, classifications, and format, you can confidently tackle exam questions and build a strong foundation for financial analysis. Use this guide, practice regularly, and leverage recommended resources to excel in your CBSE exams.

Company

(a) Acquired machinery for Rs. 2,50,000 paying $20 \%$ by cheque and executing a bond for the balance payable. (ii) Interest expense was Rs. 400 of which Rs. 170 was paid during the period. Rs. 100 relating to interest expense of the prior period was also paid during the period.

Second, we will start by calculating the opening balance, which is the amount of cash available to the company at the beginning of the specified period. This balance may be the remaining cash balance from the previous financial period or any cash balance available at the beginning of the new period. The cash flow analysis on the basis of major activities i.e. Operating, Investing and Financial, facilitate the management to assess the effectives of management’s financial policies. Enterprises need cash for essentially the same reasons, however, different from their principal revenue – producing activities might be.

Goals vs Objectives: What is the Difference & Examples

For instance, goods purchased on credit and goods sold on credit will not be included in this statement as these transactions have no effect on inflow and outflow of cash. Classification helps students accurately categorize cash movements during practice and exams, minimizing errors. Proper classification (into operating, investing, or financing activities) ensures clarity in computations and helps answer application-based questions, which are frequent in CBSE exams for Accountancy. The statement offers transparency by providing a detailed breakdown of cash flows from various activities, such as operating, investing, and financing.

Company Type

They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors. Purchases of cash equivalent securities (e.g. Purchase of short-term investment Purchases of Treasury bills). Describe “Indirect” method of ascertaining Cash Flow from operating activities. Net profit for the year after charging ₹50,000 as depreciation was ₹1,50,000, dividend paid on share was ₹50,000.

Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Cash equivalents are short-term, highly liquid investments that are readily convertible into known objectives of cash flow statement amounts of cash and which are subject to an insignificant risk of changes in value. Cash, according to AS-3, includes money held and money in demand deposits with banks. Cash equivalents refer to short-term, highly liquid investments easily convertible into known cash amounts with minimal risk of value change.

What are cash flow statements, and what are their types?

As stated earlier, cash flow statement shows inflows and outflows of cash and cash equivalents from various activities of an enterprise during a particular period. An investment normally qualifies as cash equivalents only when it has a short maturity, of say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents unless they are in substantial cash equivalents. For example, preference shares of a company acquired shortly before their specific redemption date, provided there is only insignificant risk of failure of the company to repay the amount at maturity. Similarly, short-term marketable securities which can be readily converted into cash are treated as cash equivalents and is liquidable immediately without considerable change in value.

• (i) The first and most important objective of cash flow statement is that helps to ascertain the grossinflows and out flows of cash and cash equivalents from operating, investing and financial activities.
• While preparing cash flow statement, previous year’s proposed dividend will be added to Act Profit under operating activities and will be shown under financial activity.
• This post will discuss the differences between goals and objectives and how to set them effectively.
• Let’s break down this example based on the SMART criteria and goal vs. objective definitions we’ve covered in this post.
• Describe ”Indirect” method of ascertaining cash flow from operating activities.

It is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Typical adjustments appearing here include changes in long and short term debt (issuing and redemption), issuing of preferred stock, issuing of common stock, retirement of stock, and stock dividends paid in cash. Cash Flows imply movement of cash in and out due to some non-cash items. In this way statement of changes in financial position measured through cash only has drawbacks and does not indicate accurately the changes in financial position. The statement has utility for making short-term financial planning but for long-term planning this statement would not be useful. Because of the limited usefulness of statement of changes in cash, the preparation of statement of changes in working capital (popularly known as funds flow statement) has been suggested.

CBSE Class 12 Accountancy: Cash Flow Statement Notes PDF Download

• In summary, the cash flow statement not only provides a clear picture of a company’s current financial status but also aids in predicting its future financial performance, making it indispensable for comprehensive financial analysis.
• The cash equivalents are held by the business to meet their short-term needs and commitments for investment purposes.
• Question 85.From the following balance sheet of DCX Ltd and the additional information as at 31st March, 2018.
• Items that are classified as investing or financing activities like profit or loss on sale of fixed assets, interest received, the dividend paid, etc. are also ignored.

One difficulty with the direct approach is that some of the cash flows may have characteristics of more than one category of cash flow. Cash flows refer to the movement of cash into and out of a business because of non-cash items. When cash is received from a non-cash item, it’s called cash inflow, and when cash is paid for such items, it’s termed as cash outflow. One of the primary reasons the Cash Flow Statement is crucial is its role in assessing a company’s liquidity. Liquidity refers to a company’s ability to meet its short-term financial obligations promptly.

For example, for a company manufacturing garments, operating activities are procurement of raw material, incurrence of manufacturing expenses, sale of garments, etc. These are the principal revenue generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities. There is also a third important financial statement known as Cash flow statement, which shows inflows and outflows of the cash and cash equivalents. It has gained substantial importance in the last decade because of its practical utility to the users of financial information. These sections help students review the entire chapter quickly and systematically for the board exams. Third, we will calculate cash flow by summing up all cash inflows to the company during the financial period and subtracting all cash outflows from the company during the same period.

Cash Flow from Investing Activities

Compute net cash provided by operations for the year ended March 31, 2017 by the indirect method. Yes, the nature or type of an enterprise can change altogether the category into which a particular activity may be classified. This can be better understood with the help of an example of two firms. One engaged in real estate and the other engaged in general business. State clearly what would constitute the operating activities for the following types of enterprises.