Chapter 6 of NCERT Class 12 Accountancy Part 2 focuses on Cash Flow Statement, one of the most practical chapters in the subject. It teaches us how to track the flow of cash in and out of a business. The main idea is to break down cash movements into operating, investing, and financing activities. This helps in understanding whether a business is truly making money or just showing profits on paper. The format, adjustments and interpretation are important parts of this chapter.
I am writing about this chapter because many students feel confident about the theory part but get stuck in the practical section. Calculating net cash from operations or adjusting for non-cash items like depreciation is where mistakes often happen. But this chapter can be a scoring one if prepared properly. Knowing how to read and prepare a cash flow statement is also useful beyond exams. Whether you’re doing B.Com, CA, or even running a small business, this knowledge is directly applicable. So, it’s important not to just study it for marks but to really understand the concept and how to apply it.
What is a Cash Flow Statement?
A cash flow statement shows how much cash is coming in and going out of a business during a particular period. It is prepared to check the actual liquidity of a business. It is different from the Profit and Loss Account which shows only profit, not cash.
The cash flow statement has three main parts:
1. Operating Activities
These are the core business activities like sales, purchase of goods, payment of salaries, rent, etc. It includes:
- Cash received from customers
- Cash paid to suppliers
- Payments of expenses
- Adjustments like depreciation, loss or gain on sale of assets
Example:
If a company made sales worth ₹10,00,000 but only received ₹8,00,000 in cash, then only ₹8,00,000 is shown here.
2. Investing Activities
This includes cash flow from purchase or sale of long-term assets like machinery, land, buildings, or investments.
- Purchase of fixed assets = cash outflow
- Sale of fixed assets = cash inflow
Example:
If a company sells an old machine for ₹1,50,000, it will be added under cash inflow in investing activities.
3. Financing Activities
This includes cash received or paid related to share capital, loans and dividend.
- Issue of shares or debentures = inflow
- Repayment of loan = outflow
- Dividend paid = outflow
Tips to Prepare for Board Exams
- Focus on the indirect method, as NCERT mainly follows that
- Always adjust net profit with non-cash and non-operating items
- Practise past year papers and sample questions
- Try solving at least one full format question daily before exams
- Understand the nature of each activity instead of blindly memorising
A common doubt among students is whether to show depreciation as inflow. The answer is no. Depreciation is a non-cash expense, so it’s added back to net profit in the operating section, but it doesn’t appear separately in the inflow or outflow.
Download PDF – NCERT Class 12 Accountancy Part 2 Chapter 6
If you want to revise offline or keep a copy on your device, you can easily download the full chapter PDF from here.
