by Three graded problems (with full solutions) for preparing the Statement of Cash Flows using the Indirect Method. Each problem gives a trial-result / adjustments, then shows a clear step-by-step indirect-method cash flow statement (Operating → Investing → Financing), reconciliation to opening/closing cash, and short notes. Use them for practice or class handouts.
Quick reminder — Indirect method (operating section)
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Start with Net Profit / (Loss) before tax and extraordinary items (or after tax if given — adjust accordingly).
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Add back non-cash expenses (depreciation, amortization, losses) and subtract non-cash gains (profit on sale of asset/investment).
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Adjust for working-capital changes: Increase in current assets → subtract; decrease → add. Increase in current liabilities → add; decrease → subtract.
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Subtract cash interest paid and cash tax paid (unless interest/tax are separately classified).
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The result = Net Cash from Operating Activities.
Problem 1 — Basic (small adjustments)
Data / Given
Net profit for year (after tax) : ₹200,000
Depreciation charged : ₹30,000
Increase in Debtors : ₹10,000
Decrease in Inventory : ₹5,000
Increase in Creditors : ₹8,000
Interest paid (cash) : ₹12,000 (classified as operating)
Tax paid (cash) : ₹50,000
Opening cash & bank : ₹20,000
No investing / financing activity given.
Prepare: Cash Flow Statement (Indirect Method)
A. Cash flows from Operating Activities
Net profit (given) ………………………………. ₹200,000
Add: Depreciation ………………………………. ₹30,000
Add: — (no other non-cash items) ……………….. —
Subtotal ……………………………………….. ₹230,000
Adjust working capital:
Less: Increase in Debtors ………………………. (₹10,000) → ₹220,000
Add: Decrease in Inventory …………………….. +₹5,000 → ₹225,000
Add: Increase in Creditors …………………….. +₹8,000 → ₹233,000
Less: Interest paid (cash) ………………………. (₹12,000) → ₹221,000
Less: Tax paid (cash) ………………………….. (₹50,000) → ₹171,000
Net cash from operating activities = ₹171,000
B. Cash flows from Investing Activities = ₹0 (none given)
C. Cash flows from Financing Activities = ₹0 (none given)
Net increase in cash = ₹171,000
Opening cash = ₹20,000 → Closing cash = ₹191,000
Problem 2 — Medium (operating + investing + financing):
Data / Given
Net profit before tax : ₹500,000
Depreciation : ₹80,000
Loss on sale of machine : ₹20,000 (book loss)
Inventory ↑ by ₹40,000
Trade payables ↓ by ₹15,000
Dividends received (cash) : ₹10,000 (classify as investing)
Interest income : ₹5,000 (investing)
Interest paid (cash) : ₹25,000 (operating)
Tax paid (cash) : ₹120,000
Purchase of Plant (cash) : ₹150,000
Sale of old machine (cash received) : ₹50,000 (book value ₹70,000 ⇒ loss ₹20,000 accounted above)
Proceeds from long-term borrowings : ₹200,000
Repayment of long-term loan : ₹80,000
Dividend paid : ₹60,000
Opening cash : ₹60,000
A. Cash flows from Operating Activities (Indirect)
Net profit before tax ………………………… ₹500,000
Add: Depreciation ………………………….. ₹80,000 → ₹580,000
Add: Loss on sale of machine …………………. ₹20,000 → ₹600,000
Working-capital adjustments:
Less: Increase in Inventory ………………….. (₹40,000) → ₹560,000
Less: Decrease in Trade Payables ……………… (₹15,000) → ₹545,000
Less: Interest paid (cash) …………………… (₹25,000) → ₹520,000
Less: Tax paid (cash) ………………………… (₹120,000) → ₹400,000
Net cash from operating activities = ₹400,000
B. Cash flows from Investing Activities
Proceeds from sale of machine …………………. ₹50,000
Add: Dividends received ………………………. ₹10,000
Add: Interest received (investing) ……………… ₹5,000
Less: Purchase of Plant ………………………….. (₹150,000)
Net cash used in investing activities = 50,000 + 10,000 + 5,000 − 150,000 = (₹85,000)
C. Cash flows from Financing Activities
Proceeds from long-term borrowings ……………… ₹200,000
Less: Repayment of long-term loan ………………. (₹80,000)
Less: Dividend paid ……………………………. (₹60,000)
Net cash from financing activities = 200,000 − 80,000 − 60,000 = ₹60,000
Net increase in cash = Operating 400,000 + Investing (−85,000) + Financing 60,000 = ₹375,000
Opening cash ₹60,000 → Closing cash = ₹435,000
Problem 3 — Complex (multiple non-cash items + investing & financing)
Data / Given
Net profit before tax : ₹1,200,000
Depreciation : ₹150,000
Amortization of goodwill : ₹30,000
Profit on sale of investment : ₹25,000 (non-cash gain — to be deducted)
Increase in Trade Receivables : ₹120,000
Decrease in Inventory : ₹40,000
Interest paid (cash) : ₹60,000 (operating)
Tax paid (cash) : ₹300,000
Purchase of investments : ₹200,000 (cash outflow)
Sale of investments (cash received) : ₹150,000 (profit 25k included above)
Purchase of fixed assets (cash) : ₹400,000
Proceeds from issue of equity shares : ₹500,000
Redemption of preference shares : ₹100,000
Increase in short-term borrowings (bank overdraft) : ₹100,000
Dividends paid : ₹200,000
Opening cash & bank : ₹250,000
A. Cash flows from Operating Activities (Indirect)
Start with: Net profit before tax …………….. ₹1,200,000
Add: Depreciation ………………………….. ₹150,000 → ₹1,350,000
Add: Amortization of goodwill ……………….. ₹30,000 → ₹1,380,000
Less: Profit on sale of investments ………….. (₹25,000) → ₹1,355,000
Working capital adjustments:
Less: Increase in Trade Receivables …………. (₹120,000) → ₹1,235,000
Add: Decrease in Inventory ………………….. +₹40,000 → ₹1,275,000
Less: Interest paid (cash) …………………… (₹60,000) → ₹1,215,000
Less: Tax paid (cash) ………………………… (₹300,000) → ₹915,000
Net cash from operating activities = ₹915,000
B. Cash flows from Investing Activities
Proceeds from sale of investments ……………. ₹150,000
Less: Purchase of investments ………………… (₹200,000)
Less: Purchase of fixed assets ……………….. (₹400,000)
Net cash used in investing activities = 150,000 − 200,000 − 400,000 = (₹450,000)
C. Cash flows from Financing Activities
Proceeds from issue of shares ……………….. ₹500,000
Add: Increase in short-term borrowings (bank OD) . ₹100,000
Less: Redemption of preference shares …………. (₹100,000)
Less: Dividends paid ………………………… (₹200,000)
Net cash from financing activities = 500,000 + 100,000 − 100,000 − 200,000 = ₹300,000
Net increase in cash = Operating 915,000 + Investing (−450,000) + Financing 300,000 = ₹765,000
Opening cash ₹250,000 → Closing cash = ₹1,015,000
Short teaching notes (what to watch for in exam/problems)
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Start-point clarity: confirm whether “net profit” given is before or after tax and whether interest is included. Adjust method depends on that.
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Non-cash items: always add back depreciation/amortization and non-cash losses; deduct non-cash gains (profit on sale).
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Working capital: treat increases in assets as cash outflows; increases in liabilities as cash inflows. Be consistent.
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Interest & dividends: classify as per problem instructions or accounting policy — commonly interest paid = operating, interest received & dividends received often classified under investing (but some companies treat interest received/paid as operating). Follow the classification given.
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Investing & financing sections show actual cash flows (proceeds/purchases, issue/repayment).
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Reconcile: Net increase + Opening cash must equal Closing cash (balance-sheet check).
