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Ch 14 · Financial Analysis · T.S. Grewal — Analysis of Financial Statements

Cash Flow
Statement

75 MCQs 50 Flashcards T.S. Grewal Class 12 Updated May 2026
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Chapter Overview

Chapter 14 introduces the Cash Flow Statement (CFS) — a financial statement prepared per AS-3 (Revised) that reports the inflows and outflows of cash and cash equivalents during a period. While the Statement of Profit & Loss reports book profits on accrual basis and the Balance Sheet shows the firm's position on a single date, the CFS bridges the two by explaining how the firm's cash balance has actually changed. It classifies every cash flow under one of three heads — Operating, Investing and Financing activities — and ends by reconciling opening cash and cash equivalents to closing cash and cash equivalents.

The chapter centres on the Indirect Method (the method used by CBSE and T.S. Grewal). Cash from Operating Activities is computed by starting with Net Profit before Tax and Extraordinary Items, adding back non-cash charges (Depreciation, Goodwill written off, Loss on sale of fixed assets) and interest paid on long-term borrowings, deducting non-operating credits (Profit on sale of assets, Interest received, Dividend received), then adjusting for working-capital changes (increase in current assets is deducted; increase in current liabilities is added) and finally deducting Income Tax paid. Investing Activities cover purchase and sale of fixed assets, investments, and interest and dividend received. Financing Activities cover issue and redemption of shares and debentures, long-term loans, dividend paid, interest paid on borrowings and (per CBSE) changes in Bank Overdraft.

Special attention is paid to the CBSE conventions for Proposed Dividend (only previous year's proposed dividend is a current-year financing outflow), Interim Dividend (always a financing outflow in the year of payment), Income Tax Paid (computed by reconstructing the Provision for Tax account) and Bank Overdraft (treated as Financing, not as part of Cash & Cash Equivalents). The chapter closes by contrasting the Cash Flow Statement with the older Funds Flow Statement, which tracked changes in working capital rather than cash.

What You'll Learn
Key Concepts
Definition
Meaning of CFS
A statement prepared under AS-3 (Revised) showing inflows and outflows of cash and cash equivalents during a period, under three activity heads.
Scope
Cash & Cash Equivalents
Cash in hand, cheques in hand, demand deposits and short-term investments with original maturity of three months or less. Bank Overdraft excluded (CBSE).
Section A
Operating Activities
Principal revenue-producing activities. Includes cash from customers, payments to suppliers and employees, and Income Tax paid.
Method
Indirect Method steps
Start NPBT, add non-cash, deduct non-operating, get Operating Profit before WC changes, apply WC changes, deduct Tax Paid.
Adjustments
Working Capital Changes
Increase in current assets is deducted; decrease added. Increase in current liabilities is added; decrease deducted.
Section B
Investing Activities
Acquisition and disposal of long-term assets and investments. Includes interest and dividend received (for non-finance cos.).
Section C
Financing Activities
Changes in capital and borrowings: issue or redemption of shares and debentures, loans, dividend paid, interest paid on long-term debt.
CBSE Rule
Proposed / Interim Dividend
Previous year's Proposed Dividend (paid this year) and current year's Interim Dividend are Financing outflows. Current year's Proposed Dividend is only a note.
Reconcile
Net Increase / Decrease in C&CE
A + B + C equals the change in Cash & Cash Equivalents during the year. Plus opening C&CE gives closing C&CE.
Compare
CFS vs Funds Flow
CFS tracks cash and cash equivalents under AS-3. Funds Flow tracks working capital and is largely outdated — not in current CBSE syllabus.
Sample MCQs
Q1. Sale proceeds of an old machine are shown in the Cash Flow Statement as:
A. Inflow under Operating Activities
B. Inflow under Financing Activities
C. Inflow under Investing Activities
D. Reduction in profit
Sale of a fixed asset is a divestment of a long-term asset — its proceeds are an Investing inflow. The profit or loss on sale is adjusted in the Operating section so it is not double-counted.
Q2. Net Profit before Tax ₹4,00,000. Depreciation ₹50,000. There are no other adjustments and no working-capital changes. Cash Generated from Operations is:
A. ₹3,50,000
B. ₹4,50,000
C. ₹4,00,000
D. ₹50,000
Cash Generated from Operations = NPBT + Depreciation = 4,00,000 + 50,000 = ₹4,50,000. Depreciation is a non-cash expense added back to Net Profit under the Indirect Method.
Q3. Plant: opening ₹6,00,000, closing ₹8,00,000. Depreciation charged ₹50,000. Plant (book value ₹40,000) sold at a profit of ₹10,000. Plant purchased during the year is:
A. ₹2,90,000
B. ₹2,40,000
C. ₹2,00,000
D. ₹3,00,000
Plant A/c: Opening 6,00,000 + Purchase X = Closing 8,00,000 + Depreciation 50,000 + Book value sold 40,000. So X = 8,00,000 + 50,000 + 40,000 − 6,00,000 = ₹2,90,000.
Frequently Asked Questions
What is the Cash Flow Statement?
The Cash Flow Statement (CFS) is a financial statement prepared per AS-3 (Revised) that shows the inflows and outflows of cash and cash equivalents during a period, classified into Operating, Investing and Financing activities. It reconciles the opening balance of cash and cash equivalents to the closing balance and helps users assess the firm's liquidity, solvency and quality of earnings. It supplements the Statement of Profit & Loss and the Balance Sheet — it does not replace them.
How is Cash from Operating Activities calculated under the Indirect Method?
Start with Net Profit before Tax and Extraordinary Items. Add back non-cash items (Depreciation, Goodwill written off, Loss on sale of fixed assets) and interest paid on long-term borrowings. Deduct non-operating items (Profit on sale of assets, Interest received, Dividend received) — these belong to Investing. The result is Operating Profit before Working Capital changes. Then adjust for working-capital changes (an increase in current assets is deducted; an increase in current liabilities is added). This gives Cash Generated from Operations. Finally deduct Income Tax paid to arrive at Net Cash from Operating Activities.
What is the difference between Operating, Investing and Financing activities?
Operating Activities are the firm's principal revenue-producing activities — sale of goods, payment to suppliers and employees, taxes paid. Investing Activities involve acquisition and disposal of long-term assets and investments — purchase or sale of plant, building, long-term investments, and (for non-financial companies) interest and dividend received. Financing Activities are those that change the size and composition of owners' capital and borrowings — issue and redemption of shares and debentures, increase or decrease in long-term loans, dividend paid, and interest paid on long-term debt. Per CBSE, Bank Overdraft is shown under Financing Activities.
Where do Interest paid and Dividend received go in the CFS?
For a non-financial company: Interest paid on long-term borrowings is a Financing outflow (and is added back to Net Profit in the Operating section since it was charged to P&L). Dividend received is an Investing inflow, because it is a return on investment. Dividend paid is always a Financing outflow. For a finance company (bank, NBFC), interest received and dividend received are treated as Operating Activities because they are part of the firm's principal revenue-producing activities.
How is Proposed Dividend treated in the Cash Flow Statement?
Per CBSE convention, Proposed Dividend of the PREVIOUS year (since approved at this year's AGM and actually paid in cash this year) is shown as a Financing OUTFLOW in the current year's CFS. The Proposed Dividend of the CURRENT year is only a board proposal, not yet approved by shareholders, so no cash has flowed — it is NOT included in the current year's CFS and is disclosed only as a note or contingent liability. Interim Dividend, on the other hand, is paid during the year and is always a Financing outflow in the year of payment.
What is the difference between Cash Flow and Funds Flow?
A Cash Flow Statement tracks the change in cash and cash equivalents only and is prepared on a CASH basis under AS-3. A Funds Flow Statement tracks the change in WORKING CAPITAL between two balance-sheet dates and is prepared on a working-capital basis. The Cash Flow Statement is governed by an accounting standard and is mandatory for most companies; the Funds Flow Statement is largely outdated and is no longer in the CBSE Class 12 syllabus. Cash Flow is more relevant for liquidity analysis because it captures actual cash availability, not just changes in working capital.