CBSE Class 12 Accountancy Cash Flow Statement Notes | Unit 5 | AS 3
CBSE Class 12 Accountancy Unit 5: Cash Flow Statement – Complete Notes
Part B: Financial Statement Analysis | Unit 5
Easy Notes | AS 3 (Revised) | Indirect Method | Solved Examples | PYQs
This is why a Cash Flow Statement is important.
In this chapter, we learn how to identify the sources and uses of cash and how cash changes during an accounting period.
These notes are written in simple, student-friendly language and are useful for CBSE Class 12 Accountancy Board Exam preparation.
๐ CBSE Class 12 Accountancy Syllabus – Unit 5
According to the official CBSE Class XII Accountancy syllabus for 2026–27, Unit 5 is Cash Flow Statement. It includes:
Meaning of Cash Flow Statement
Objectives and benefits
Cash and Cash Equivalents
Classification of activities
Preparation of Cash Flow Statement as per AS 3 (Revised)
Indirect Method only
Adjustments relating to:
Depreciation and amortisation
Profit or loss on sale of assets, including investments
Dividend – final and interim
Tax
Bank overdraft and cash credit treated as short-term borrowings
Current investments treated as marketable securities unless otherwise specified
CBSE also specifically states that students should develop the understanding and skill of preparing a Cash Flow Statement using the Indirect Method as per AS 3 with given adjustments.
๐ Marks
For the 2026–27 Class XII Accountancy structure, Part B: Financial Statement Analysis carries 20 marks, with:
Unit 3: Analysis of Financial Statements – 12 marks
Unit 4: Cash Flow Statement – 8 marks
Students choosing the Financial Statement Analysis option therefore need to prepare Cash Flow Statement carefully.
1. Meaning of Cash Flow Statement
A Cash Flow Statement is a statement which shows the inflows and outflows of cash and cash equivalents during a particular accounting period.
In simple words:
It tells us:
Where did the cash come from?
and
Where did the cash go?
Example
Suppose a company:
Received ₹5,00,000 from customers
Paid ₹3,00,000 to suppliers
Purchased machinery for ₹1,00,000
Took a bank loan of ₹2,00,000
The Cash Flow Statement helps us understand these cash movements and their classification.
2. What is Cash Flow?
Cash Flow means the movement of cash and cash equivalents into and out of the business.
There are two types of cash flows:
Cash Inflow
Cash coming into the business.
Examples:
Cash received from customers
Issue of shares for cash
Loan received
Sale of machinery for cash
Cash Outflow
Cash going out of the business.
Examples:
Payment to suppliers
Payment of salaries
Purchase of machinery for cash
Repayment of loan
Payment of dividend
Easy Trick
IN = Cash Inflow
OUT = Cash Outflow
3. Objectives of Cash Flow Statement
The major objectives are:
1. To know cash inflows
It tells us the sources from which cash has been received.
2. To know cash outflows
It tells us where cash has been spent.
3. To determine cash position
It helps determine the increase or decrease in cash during the year.
4. To assess liquidity
It helps understand whether the business has sufficient cash to meet short-term obligations.
5. To help in cash planning
Management can plan future cash requirements on the basis of cash flow information.
6. To understand operating efficiency
Cash generated from operating activities gives useful information about the business's ability to generate cash from its main operations.
7. To help users in decision-making
Investors, lenders, management and other users can use cash flow information for financial decisions.
4. Benefits / Importance of Cash Flow Statement
1. Shows actual movement of cash
Profit does not always mean that cash has been received. Cash Flow Statement shows actual cash movement.
2. Helps in liquidity analysis
It helps determine whether the business can meet its short-term payments.
3. Helps in financial planning
Management can plan future receipts and payments.
4. Helps in understanding sources of cash
It shows whether cash is generated from:
Operating activities
Investing activities
Financing activities
5. Helps in comparing cash performance
Cash flows can be compared with previous years.
6. Useful for investors and lenders
Investors and lenders can understand the cash-generating capacity of the business.
5. Cash and Cash Equivalents
This is a very important concept for the examination.
Cash
Cash includes:
Cash in hand
Cash at bank
Cash Equivalents
Cash equivalents are short-term, highly liquid investments that can be quickly converted into known amounts of cash and have insignificant risk of changes in value.
Examples
Short-term highly liquid investments
Certain marketable securities meeting the required conditions
Easy Understanding
Think of cash equivalents as:
“Almost cash”
They are investments that can be converted into cash quickly.
6. Classification of Cash Flows
Under AS 3, cash flows are classified into three activities:
1. Operating Activities
2. Investing Activities
3. Financing Activities
Remember:
O – I – F
O = Operating
I = Investing
F = Financing
7. Operating Activities
Operating activities are the main revenue-producing activities of the business.
In simple words:
These are activities related to the normal business operations of the company.
Examples of Cash Inflows
Cash received from customers
Cash received from sale of goods
Cash received for services
Examples of Cash Outflows
Cash paid to suppliers
Cash paid to employees
Cash paid for operating expenses
Easy Example
For a school stationery business:
Cash received from sale of notebooks → Operating Activity
Cash paid to stationery suppliers → Operating Activity
Salaries paid → Operating Activity
Remember
Normal business = Operating Activity
8. Investing Activities
Investing activities relate mainly to the purchase and sale of long-term assets and investments.
Cash Inflows
Examples:
Sale of machinery for cash
Sale of building for cash
Sale of long-term investments
Interest received, where classified as investing cash flow
Cash Outflows
Examples:
Purchase of machinery
Purchase of building
Purchase of long-term investments
Easy Trick
Think:
Investment in assets = Investing Activity
9. Financing Activities
Financing activities are activities that result in changes in the size and composition of the owner's capital and borrowings.
Cash Inflows
Issue of equity shares for cash
Issue of preference shares for cash
Issue of debentures for cash
Taking a long-term loan
Cash Outflows
Redemption of preference shares
Redemption of debentures
Repayment of long-term loan
Dividend paid
Easy Trick
Capital + Long-term Borrowings = Financing Activity
10. Operating vs Investing vs Financing Activities
| Activity | Main Meaning | Examples |
|---|---|---|
| Operating | Main business operations | Cash from customers, suppliers, salaries |
| Investing | Long-term assets/investments | Purchase/sale of machinery |
| Financing | Capital and borrowings | Issue of shares, loans, repayment |
One-Line Revision
Operating = Business
Investing = Assets & Investments
Financing = Capital & Borrowings
11. Cash Flow Statement – Basic Format
A Cash Flow Statement can be understood through the following structure:
A. Cash Flow from Operating Activities
Add/Subtract operating adjustments
Net Cash Flow from Operating Activities
B. Cash Flow from Investing Activities
Cash inflows from investing
Less: Cash outflows from investing
Net Cash Flow from Investing Activities
C. Cash Flow from Financing Activities
Cash inflows from financing
Less: Cash outflows from financing
Net Cash Flow from Financing Activities
Finally:
Net Increase/Decrease in Cash and Cash Equivalents
Add:
Opening Cash and Cash Equivalents
Equals:
Closing Cash and Cash Equivalents
12. Cash Flow Statement – Indirect Method
CBSE Class 12 syllabus specifically requires the Indirect Method.
Under the indirect method, we start with:
Profit before Tax
or the profit figure specified in the question.
Then we make adjustments for:
Non-cash items
Non-operating items
Changes in working capital
The objective is to convert the accounting profit into cash generated from operating activities.
13. Steps of Indirect Method
Remember this sequence:
Step 1
Start with Net Profit before Tax as required by the question.
Step 2
Add non-cash expenses.
Example:
Depreciation → Add
Step 3
Subtract non-operating incomes.
Example:
Profit on Sale of Machinery → Less
Step 4
Add non-operating losses.
Example:
Loss on Sale of Machinery → Add
Step 5
Adjust changes in working capital.
Step 6
Deduct tax paid where applicable.
Step 7
Find:
Net Cash Flow from Operating Activities
14. Important Adjustments in Cash Flow Statement
This is one of the most important areas for CBSE Board Exam.
A. Depreciation
Depreciation is a non-cash expense.
It reduces accounting profit but does not involve an actual cash outflow.
Therefore:
Depreciation → ADD to Profit
Example
Profit before tax = ₹2,00,000
Depreciation = ₹30,000
Cash flow adjustment:
₹2,00,000 + ₹30,000 = ₹2,30,000
15. Amortisation
Amortisation is also a non-cash expense.
Therefore:
Amortisation → ADD
Example
Profit before tax = ₹3,00,000
Amortisation = ₹20,000
Adjusted amount:
₹3,00,000 + ₹20,000
= ₹3,20,000
16. Profit on Sale of Asset
Profit on sale of machinery is included in accounting profit.
But the actual sale proceeds are shown under Investing Activities.
Therefore, while calculating operating cash flow:
Profit on Sale of Asset → LESS
Example
Profit before tax = ₹5,00,000
Profit on sale of machinery = ₹40,000
Operating adjustment:
₹5,00,000 – ₹40,000
= ₹4,60,000 before other adjustments.
17. Loss on Sale of Asset
Loss on sale of asset reduces accounting profit but is not an operating cash expense.
Therefore:
Loss on Sale of Asset → ADD
Easy Rule
Profit → Less
Loss → Add
18. Profit/Loss on Sale of Investments
The same basic treatment is applied to profit or loss on sale of investments while determining operating cash flow under the indirect method:
Profit on Sale of Investment → Less
Loss on Sale of Investment → Add
The actual cash proceeds from sale of investments are considered under Investing Activities, according to the classification applicable to the item.
19. Dividend Received
Dividend received is not treated as an operating adjustment merely because it increases profit.
For exam questions, follow the classification specified under AS 3 and the treatment required in the question.
Where dividend received is classified as an investing cash flow:
Dividend Received → Deduct from operating profit
and show the actual cash receipt under:
Investing Activities
20. Dividend Paid
Dividend paid represents a cash outflow.
For CBSE questions, carefully read whether the amount is final dividend, interim dividend or proposed dividend and apply the treatment required by the question and syllabus.
The official CBSE syllabus specifically mentions adjustments relating to final and interim dividend.
Important Exam Point
Do not blindly treat every dividend figure in the Balance Sheet as cash paid.
First identify what the question is asking.
21. Tax
Tax is an important adjustment in Cash Flow Statement questions.
Generally:
Tax Paid → Cash Outflow
It is deducted while calculating cash flow from operating activities when the question requires it.
Important
Students should distinguish between:
Tax expense
and
Tax actually paid
because the two amounts may not always be equal.
22. Working Capital Adjustments
This is a very important part of the indirect method.
Remember:
Current Assets
Increase in Current Asset → SUBTRACT
Decrease in Current Asset → ADD
Current Liabilities
Increase in Current Liability → ADD
Decrease in Current Liability → SUBTRACT
23. Easy Working Capital Trick
Remember:
Current Assets
Increase = Minus
Decrease = Plus
Current Liabilities
Increase = Plus
Decrease = Minus
Shortcut
Asset opposite, Liability same
24. Example of Working Capital Adjustment
Suppose:
Trade Receivables increased from ₹50,000 to ₹70,000.
Increase = ₹20,000
Trade receivables are current assets.
Therefore:
₹20,000 → Less
Suppose Trade Payables increased from ₹40,000 to ₹55,000.
Increase = ₹15,000
Trade payables are current liabilities.
Therefore:
₹15,000 → Add
25. Important CBSE Treatment – Bank Overdraft and Cash Credit
According to the CBSE syllabus:
Bank overdraft and cash credit are treated as short-term borrowings.
Therefore, students should not automatically treat them as cash equivalents.
This treatment is specifically mentioned in the official syllabus.
Exam Tip
If the question specifically gives:
Bank Overdraft / Cash Credit
read the instruction carefully and treat it according to the CBSE syllabus.
26. Current Investments
CBSE specifies that:
Current Investments are to be taken as Marketable Securities unless otherwise specified.
This is an important board-exam instruction.
Exam Tip
If the question says Current Investment, do not make your own assumption. Follow the CBSE treatment given in the syllabus/question.
27. Solved Example – Indirect Method
Question
From the following information, calculate Cash Flow from Operating Activities:
Profit before Tax = ₹2,00,000
Depreciation = ₹30,000
Profit on Sale of Machinery = ₹10,000
Increase in Trade Receivables = ₹20,000
Increase in Trade Payables = ₹15,000
Tax Paid = ₹25,000
Solution
Step 1: Profit before Tax
₹2,00,000
Step 2: Add Depreciation
₹30,000
Step 3: Less Profit on Sale of Machinery
– ₹10,000
Step 4: Increase in Trade Receivables
– ₹20,000
Step 5: Increase in Trade Payables
₹15,000
Step 6: Less Tax Paid
– ₹25,000
Cash Flow from Operating Activities
= ₹2,00,000 + ₹30,000 – ₹10,000 – ₹20,000 + ₹15,000 – ₹25,000
= ₹1,90,000
Answer:
Net Cash Flow from Operating Activities = ₹1,90,000
28. Another Easy Example
Profit before Tax = ₹4,00,000
Depreciation = ₹50,000
Loss on Sale of Machinery = ₹20,000
Increase in Inventory = ₹30,000
Decrease in Trade Receivables = ₹10,000
Increase in Trade Payables = ₹25,000
Tax Paid = ₹40,000
Solution
| Particulars | ₹ |
|---|---|
| Profit before Tax | 4,00,000 |
| Add: Depreciation | 50,000 |
| Add: Loss on Sale of Machinery | 20,000 |
| Less: Increase in Inventory | (30,000) |
| Add: Decrease in Trade Receivables | 10,000 |
| Add: Increase in Trade Payables | 25,000 |
| Less: Tax Paid | (40,000) |
| Cash Flow from Operating Activities | 4,35,000 |
Therefore:
CFO = ₹4,35,000
29. Investing Activities – Examples
| Transaction | Activity |
|---|---|
| Purchase of Machinery | Investing |
| Sale of Machinery | Investing |
| Purchase of Building | Investing |
| Sale of Building | Investing |
| Purchase of Long-term Investment | Investing |
| Sale of Long-term Investment | Investing |
Easy Trick
If the transaction is related to long-term assets or investments, think:
INVESTING
30. Financing Activities – Examples
| Transaction | Activity |
|---|---|
| Issue of Equity Shares | Financing |
| Issue of Preference Shares | Financing |
| Issue of Debentures | Financing |
| Long-term Loan Taken | Financing |
| Repayment of Long-term Loan | Financing |
| Redemption of Debentures | Financing |
| Dividend Paid | Financing, subject to applicable classification |
Easy Trick
Think:
CAPITAL + BORROWINGS = FINANCING
31. Complete Cash Flow Statement – Simple Format
Cash Flow Statement
A. Cash Flow from Operating Activities
Profit before Tax
Add: Depreciation
Add: Other non-cash expenses
Add: Loss on Sale of Asset
Less: Profit on Sale of Asset
Less/Add: Changes in Working Capital
Less: Tax Paid
Net Cash Flow from Operating Activities
B. Cash Flow from Investing Activities
Cash received from Sale of Fixed Assets
Cash received from Sale of Investments
Less: Purchase of Fixed Assets
Less: Purchase of Investments
Net Cash Flow from Investing Activities
C. Cash Flow from Financing Activities
Proceeds from Issue of Shares
Proceeds from Debentures/Loans
Less: Redemption/Repayment
Less: Dividend Paid, where applicable
Net Cash Flow from Financing Activities
D. Net Increase/Decrease in Cash and Cash Equivalents
Add: Opening Cash and Cash Equivalents
Closing Cash and Cash Equivalents
32. Most Important Rules for Board Exam
Rule 1
Depreciation → Add
Rule 2
Amortisation → Add
Rule 3
Profit on Sale of Asset → Less
Rule 4
Loss on Sale of Asset → Add
Rule 5
Increase in Current Asset → Less
Rule 6
Decrease in Current Asset → Add
Rule 7
Increase in Current Liability → Add
Rule 8
Decrease in Current Liability → Less
Rule 9
Purchase/Sale of Fixed Assets → Investing
Rule 10
Issue/Redemption of Shares or Debentures → Financing
33. Cash Flow Statement vs Fund Flow – Basic Difference
Students sometimes confuse cash flow with fund flow.
Cash Flow
Deals with:
Cash and Cash Equivalents
Fund Flow
Traditionally focuses on changes in:
Working Capital
For Class 12 Cash Flow Statement, focus on the cash and cash equivalents approach prescribed under the syllabus.
34. Cash Flow Statement – Quick Revision Chart
OPERATING
Normal business activities
Examples:
Cash from customers
Payment to suppliers
Salaries
Operating expenses
INVESTING
Long-term assets and investments
Examples:
Purchase of machinery
Sale of machinery
Purchase/sale of investments
FINANCING
Capital and borrowings
Examples:
Issue of shares
Issue of debentures
Loan taken
Loan repaid
Redemption
Remember:
O → Business
I → Assets & Investments
F → Capital & Borrowings
35. Important Short Answer Questions
Q1. What is a Cash Flow Statement?
Answer:
A Cash Flow Statement is a statement showing the inflows and outflows of cash and cash equivalents during an accounting period.
Q2. What are the three types of activities in a Cash Flow Statement?
Answer:
Operating Activities
Investing Activities
Financing Activities
Q3. Why is depreciation added back to profit while calculating cash flow from operating activities?
Answer:
Depreciation is a non-cash expense. It reduces accounting profit but does not involve an actual cash outflow. Therefore, it is added back to profit under the indirect method.
Q4. Why is profit on sale of machinery deducted from operating profit?
Answer:
Profit on sale of machinery is a non-operating income. The actual sale proceeds are considered under investing activities. Therefore, the profit is deducted while calculating cash flow from operating activities.
Q5. What is meant by Cash Equivalent?
Answer:
Cash equivalents are short-term, highly liquid investments that can be readily converted into known amounts of cash and have insignificant risk of changes in value.
Q6. Name the three activities of Cash Flow Statement.
Answer:
Operating Activities
Investing Activities
Financing Activities
36. Important 3-Mark Questions
Q1. Explain any three objectives of Cash Flow Statement.
Answer:
It helps to determine the sources and uses of cash.
It helps to assess the liquidity position of the business.
It helps management in cash planning and decision-making.
Q2. Explain Operating, Investing and Financing Activities.
Answer:
Operating Activities: Activities related to the main revenue-producing operations of the business.
Investing Activities: Activities relating to acquisition and disposal of long-term assets and investments.
Financing Activities: Activities resulting in changes in owner's capital and borrowings.
Q3. State the treatment of the following under the indirect method:
Depreciation
Profit on Sale of Machinery
Loss on Sale of Machinery
Answer:
| Item | Treatment |
|---|---|
| Depreciation | Add |
| Profit on Sale of Machinery | Less |
| Loss on Sale of Machinery | Add |
37. Important 4-Mark Question
Question
State whether the following are Operating, Investing or Financing Activities:
Cash received from customers
Purchase of machinery for cash
Issue of shares for cash
Repayment of long-term loan
Answer
| Transaction | Activity |
|---|---|
| Cash received from customers | Operating |
| Purchase of machinery | Investing |
| Issue of shares | Financing |
| Repayment of long-term loan | Financing |
38. Important 6-Mark Numerical Question
Question
Calculate Cash Flow from Operating Activities from the following:
Profit before Tax = ₹3,50,000
Depreciation = ₹40,000
Profit on Sale of Machinery = ₹15,000
Increase in Inventory = ₹20,000
Decrease in Trade Receivables = ₹10,000
Increase in Trade Payables = ₹25,000
Tax Paid = ₹50,000
Solution
| Particulars | ₹ |
|---|---|
| Profit before Tax | 3,50,000 |
| Add: Depreciation | 40,000 |
| Less: Profit on Sale of Machinery | (15,000) |
| Less: Increase in Inventory | (20,000) |
| Add: Decrease in Trade Receivables | 10,000 |
| Add: Increase in Trade Payables | 25,000 |
| Less: Tax Paid | (50,000) |
| Cash Flow from Operating Activities | 3,40,000 |
Answer:
Net Cash Flow from Operating Activities = ₹3,40,000
39. PYQ / PYQ-Based Practice Questions
Exam Note: The questions below are designed in the style of CBSE previous-year/sample-paper concepts. They are provided as PYQ-style practice questions, not claimed as verbatim copies of a particular year's board paper.
PYQ Practice – 1 Mark
Q1.
Depreciation charged on machinery is:
A. Operating cash inflow
B. Operating cash outflow
C. Non-cash expense added back under indirect method
D. Financing cash flow
Answer: C
Q2.
Purchase of machinery for cash is classified as:
A. Operating Activity
B. Investing Activity
C. Financing Activity
D. Non-cash Activity
Answer: B
Q3.
Issue of equity shares for cash is:
A. Operating Activity
B. Investing Activity
C. Financing Activity
D. None
Answer: C
Q4.
An increase in trade receivables is:
A. Added to profit
B. Deducted from profit
C. Ignored
D. Shown under financing activity
Answer: B
Q5.
An increase in trade payables is:
A. Deducted
B. Added
C. Ignored
D. Shown under investing activity
Answer: B
40. PYQ-Based 3-Mark Question
Question
From the following information, calculate Cash Flow from Operating Activities:
Profit before Tax = ₹2,50,000
Depreciation = ₹30,000
Increase in Inventory = ₹20,000
Increase in Trade Payables = ₹15,000
Answer
₹2,50,000
₹30,000
– ₹20,000₹15,000
CFO = ₹2,75,000
41. PYQ-Based 4-Mark Question
Question
Classify the following as Operating, Investing or Financing Activities:
Cash received from customers
Purchase of land
Issue of debentures for cash
Payment to suppliers
Answer
Cash received from customers → Operating
Purchase of land → Investing
Issue of debentures → Financing
Payment to suppliers → Operating
42. PYQ-Based 6-Mark Question
Question
Calculate Cash Flow from Operating Activities:
Profit before Tax = ₹4,00,000
Depreciation = ₹60,000
Amortisation = ₹20,000
Profit on Sale of Investment = ₹15,000
Increase in Trade Receivables = ₹25,000
Decrease in Inventory = ₹10,000
Increase in Trade Payables = ₹20,000
Tax Paid = ₹50,000
Solution
| Particulars | ₹ |
|---|---|
| Profit before Tax | 4,00,000 |
| Add: Depreciation | 60,000 |
| Add: Amortisation | 20,000 |
| Less: Profit on Sale of Investment | (15,000) |
| Less: Increase in Trade Receivables | (25,000) |
| Add: Decrease in Inventory | 10,000 |
| Add: Increase in Trade Payables | 20,000 |
| Less: Tax Paid | (50,000) |
| Cash Flow from Operating Activities | 4,20,000 |
Answer:
Cash Flow from Operating Activities = ₹4,20,000
43. Case Study Based Question
Case
ABC Ltd. earned a profit before tax of ₹5,00,000 during the year.
The following information is available:
Depreciation = ₹50,000
Profit on Sale of Machinery = ₹20,000
Trade Receivables increased by ₹30,000
Trade Payables increased by ₹25,000
Tax paid = ₹60,000
Questions
1. Why is depreciation added back?
Because depreciation is a non-cash expense.
2. What will be the treatment of profit on sale of machinery?
It will be deducted from operating profit.
3. What is the treatment of increase in trade receivables?
It will be deducted.
4. What is the treatment of increase in trade payables?
It will be added.
5. Calculate CFO.
₹5,00,000
₹50,000
– ₹20,000
– ₹30,000₹25,000
– ₹60,000
CFO = ₹4,65,000
44. Assertion and Reason Questions
Q1.
Assertion: Depreciation is added back while calculating operating cash flow under the indirect method.
Reason: Depreciation is a non-cash expense.
Answer: Both Assertion and Reason are correct, and Reason correctly explains Assertion.
Q2.
Assertion: Purchase of machinery is an investing activity.
Reason: Machinery is a long-term asset.
Answer: Both Assertion and Reason are correct, and Reason correctly explains Assertion.
Q3.
Assertion: Increase in trade receivables is added to profit.
Reason: Increase in trade receivables means more cash has been received.
Answer: Both statements are incorrect.
45. Common Mistakes Students Should Avoid
❌ Mistake 1
Adding profit on sale of machinery.
Correct:
Profit → Less
❌ Mistake 2
Subtracting depreciation.
Correct:
Depreciation → Add
❌ Mistake 3
Adding increase in trade receivables.
Correct:
Increase in Current Asset → Less
❌ Mistake 4
Subtracting increase in trade payables.
Correct:
Increase in Current Liability → Add
❌ Mistake 5
Confusing investing and financing activities.
Remember:
Machinery → Investing
Shares/Debentures/Loans → Financing
46. One-Page Revision – Cash Flow Statement
CASH FLOW STATEMENT
Operating Activities
Normal business activities
Examples:
Customers, suppliers, employees, operating expenses
Investing Activities
Long-term assets and investments
Examples:
Machinery, building, investments
Financing Activities
Capital and borrowings
Examples:
Shares, debentures, loans, repayment
INDIRECT METHOD
Start:
Profit Before Tax
Add:
Depreciation
Amortisation
Loss on Sale of Asset
Less:
Profit on Sale of Asset
Profit on Sale of Investment
Working Capital:
Current Asset ↑ = Less
Current Asset ↓ = Add
Current Liability ↑ = Add
Current Liability ↓ = Less
47. Super Easy Memory Trick
“D-L-P-W”
D = Depreciation → Add
L = Loss → Add
P = Profit on Sale → Less
W = Working Capital Adjustment
And remember:
Asset ↑ → Minus
Liability ↑ → Plus
48. CBSE Board Exam Strategy
When solving a Cash Flow Statement numerical:
Step 1
Read the question carefully.
Step 2
Identify whether the amount belongs to:
Operating / Investing / Financing
Step 3
For indirect method, start with the required profit figure.
Step 4
Make non-cash and non-operating adjustments.
Step 5
Apply working capital adjustments.
Step 6
Calculate cash flows from investing activities.
Step 7
Calculate cash flows from financing activities.
Step 8
Calculate net increase/decrease in cash.
Step 9
Check closing cash and cash equivalents.
Board Exam Mantra:
Classification first → Adjustment second → Calculation third → Final checking last
49. Frequently Asked Questions – FAQs
Q1. Is direct method included in the CBSE Class 12 syllabus?
For the syllabus referenced here, CBSE specifies Indirect Method only for preparation of the Cash Flow Statement.
Q2. Is depreciation a cash expense?
No. Depreciation is a non-cash expense.
Q3. Which activity includes purchase of machinery?
Investing Activity.
Q4. Which activity includes issue of shares?
Financing Activity.
Q5. What happens when trade receivables increase?
The increase is deducted while calculating operating cash flow under the indirect method.
Q6. What happens when trade payables increase?
The increase is added while calculating operating cash flow.
Q7. How are bank overdraft and cash credit treated?
For this CBSE syllabus, bank overdraft and cash credit are treated as short-term borrowings.
Q8. How are current investments treated?
CBSE specifies that current investments are taken as marketable securities unless otherwise specified.
50. CBSE Official Resources
Official CBSE Accountancy Syllabus – 2026–27
Students and teachers should always refer to the latest official CBSE syllabus before the board examination.
CBSE Accountancy Syllabus 2026–27 – Official PDF
CBSE Class XII Sample Question Paper
The official CBSE website provides Class XII Sample Question Papers and Marking Schemes. The currently available official 2025–26 Accountancy SQP is useful for understanding the paper structure and question style.
CBSE Class XII Accountancy Sample Question Paper 2025–26
CBSE Accountancy Marking Scheme
CBSE Class XII Accountancy Marking Scheme 2025–26
CBSE Sample Paper Archive
CBSE Sample Question Paper Archive
Important: The syllabus above is for 2026–27, while the linked Accountancy SQP is the officially available 2025–26 sample paper. Students should check CBSE Academic for the 2026–27 SQP when it is released.
51. Final Quick Revision
Before the exam, remember these five points:
1. Cash Flow Statement
Shows movement of Cash and Cash Equivalents.
2. Three Activities
Operating + Investing + Financing
3. Indirect Method
Start with Profit and make adjustments.
4. Important Adjustments
Depreciation → Add
Profit on Sale → Less
Loss on Sale → Add
5. Working Capital
CA ↑ → Less
CA ↓ → Add
CL ↑ → Add
CL ↓ → Less
๐ฏ Final Exam Mantra
CASH FLOW STATEMENT = O + I + F
O = Operating → Main Business
I = Investing → Assets & Investments
F = Financing → Capital & Borrowings
And for Indirect Method:
Profit → Adjust → Working Capital → CFO
Practice the classification of activities and the adjustment rules regularly. Once these two areas become clear, Cash Flow Statement numericals become much easier.
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