Cash Flow Statement: Working Capital Rules, Full Format & Complete Worked Example — Class 12
Operating Activities is only one section of the Cash Flow Statement. To produce the complete statement — and verify your answer — you need to handle Investing and Financing Activities too, and understand the working capital adjustment rules well enough to apply them without hesitation.
This post brings everything together in one full worked example with a balance check at the end.
Investing Activities: What to Include
Once Operating Activities are calculated, list all cash flows related to long-term assets and investments.
Standard Format
Cash Flow from Investing Activities
─────────────────────────────────────────────────────────
Inflows:
Proceeds from Sale of Fixed Assets ₹XX,XXX
Proceeds from Sale of Investments ₹XX,XXX
Loan repayments received ₹XX,XXX
Interest received (if not in Operating) ₹XX,XXX
Dividend received (if not in Operating) ₹XX,XXX
Outflows:
Purchase of Fixed Assets (₹XX,XXX)
Purchase of Investments (₹XX,XXX)
Loans given to others (₹XX,XXX)
─────────
Net Cash from / (used in) Investing Activities (B) ₹X,XX,XXXNote on asset sales: The entire proceeds of an asset sale go to Investing Activities. The profit or loss on the sale is removed from Operating Activities (already done in the non-cash income/expense adjustments in Step 2/3 of the Indirect Method).
Financing Activities: What to Include
Cash Flow from Financing Activities
─────────────────────────────────────────────────────────
Inflows:
Proceeds from Issue of Equity Shares ₹XX,XXX
Proceeds from Issue of Preference Shares ₹XX,XXX
Proceeds from Issue of Debentures ₹XX,XXX
Long-term loans received ₹XX,XXX
Outflows:
Redemption of Preference Shares (₹XX,XXX)
Redemption of Debentures (₹XX,XXX)
Repayment of Long-term Loans (₹XX,XXX)
Dividend Paid (₹XX,XXX)
Interest Paid (if not in Operating) (₹XX,XXX)
─────────
Net Cash from / (used in) Financing Activities (C) ₹X,XX,XXXThe Complete Cash Flow Statement Format
CASH FLOW STATEMENT
For the year ended 31st March 20XX
(A) Cash Flow from Operating Activities ₹X,XX,XXX
(B) Cash Flow from Investing Activities (₹XX,XXX)
(C) Cash Flow from Financing Activities (₹XX,XXX)
─────────
Net Increase / (Decrease) in Cash and
Cash Equivalents (A + B + C) ₹X,XX,XXX
Add: Opening Cash and Cash Equivalents ₹XX,XXX
─────────
Closing Cash and Cash Equivalents ₹X,XX,XXXVerification: Closing Cash per Cash Flow Statement must equal Closing Cash per Balance Sheet. Always cross-check.
Full Worked Example
Given Information:
Item | Amount |
|---|---|
Net Profit (before tax) | ₹2,00,000 |
Depreciation | ₹40,000 |
Profit on Sale of Machinery | ₹5,000 |
Proceeds from Sale of Machinery | ₹25,000 |
Debtors — Increased by | ₹30,000 |
Creditors — Decreased by | ₹20,000 |
Stock — Decreased by | ₹15,000 |
Outstanding Expenses — Increased by | ₹10,000 |
Income Tax Paid | ₹25,000 |
Purchase of new Equipment | ₹70,000 |
Dividend Paid | ₹15,000 |
Long-term Loan Repaid | ₹5,000 |
Opening Cash Balance | ₹50,000 |
Section A: Operating Activities
Net Profit before Tax ₹2,00,000
Add: Depreciation ₹40,000
Less: Profit on Sale of Machinery (₹5,000)
─────────
Operating Profit before WC Changes ₹2,35,000
Working Capital Adjustments:
Less: Increase in Debtors (₹30,000)
Add: Decrease in Stock ₹15,000
Less: Decrease in Creditors (₹20,000)
Add: Increase in Outstanding Expenses ₹10,000
─────────
Cash Generated from Operations ₹2,10,000
Less: Income Tax Paid (₹25,000)
─────────
Net Cash from Operating Activities (A) ₹1,85,000Section B: Investing Activities
Proceeds from Sale of Machinery ₹25,000
Less: Purchase of Equipment (₹70,000)
─────────
Net Cash used in Investing Activities (B) (₹45,000)Note: The full ₹25,000 proceeds are shown here. The ₹5,000 profit was already removed from Operating Activities.
Section C: Financing Activities
Less: Dividend Paid (₹15,000)
Less: Long-term Loan Repaid (₹5,000)
─────────
Net Cash used in Financing Activities (C) (₹20,000)Final Statement
Net Cash from Operating Activities (A) ₹1,85,000
Net Cash from Investing Activities (B) (₹45,000)
Net Cash from Financing Activities (C) (₹20,000)
─────────
Net Increase in Cash and Cash Equivalents ₹1,20,000
Add: Opening Cash Balance ₹50,000
─────────
Closing Cash Balance ₹1,70,000Verification: ₹50,000 + ₹1,20,000 = ₹1,70,000 ✓
Common Working Capital Mistakes Caught Here
Mistake | What Goes Wrong | Correct Treatment |
|---|---|---|
Debtors increased → added | Cash not received yet | Deduct |
Creditors decreased → added | Cash was paid out | Deduct |
Profit on sale left in Operating | Overstates operating cash | Remove (deduct from profit) |
Full asset proceeds excluded | Understates Investing inflows | Show full proceeds in Investing |
What's Next?
In Part 4, get the complete exam strategy for Cash Flow Statement questions — the 6 most common mistakes, board exam presentation rules, the CA Foundation speed approach, and a practice plan that builds accuracy before speed.
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