NCERT Class 12 Accountancy Accountancy Part-II: Chapter 6 — Cash Flow Statement
This chapter introduces the Cash Flow Statement as a crucial financial statement, complementing the Balance Sheet and Income Statement. It details how this statement tracks the inflows and outflows of cash and cash equivalents over a period, categorized into operating, investing, and financing activities. The chapter emphasizes the statement's importance for users of financial information, enabling them to assess an enterprise's ability to generate and utilize cash. It also covers the legal framework, including the Companies Act, 2013, and Accounting Standard-3 (AS-3), which mandate its preparation. The learning objectives include understanding the purpose, distinguishing between activity types, and preparing the statement using both direct and indirect methods. The benefits highlighted include evaluating changes in net assets, financial structure, liquidity, solvency, and enhancing comparability among enterprises.
Quick info
| Board | CBSE / NCERT |
|---|---|
| Class | Class 12 |
| Subject | Accountancy |
| Book | Accountancy Part-II |
| Chapter | Chapter 6 — Cash Flow Statement |
| Language | English |
| PDF type | NCERT Textbook |
| Session | CBSE 2026 |
| Reading time | 4 minutes |
| Word count | 689 |
Learning outcomes
- State the purpose and preparation of a cash flow statement.
- Distinguish between operating, investing, and financing activities.
- Prepare the statement of cash flows using the direct method.
- Prepare the cash flow statement using the indirect method.
Vocabulary
| Word | Meaning |
|---|---|
| Cash Flow Statement | A financial statement that reports the cash generated and used during a period. |
| Cash Equivalents | Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. |
| Operating Activities | The principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. |
| Investing Activities | The acquisition and disposal of long-term assets and other investments not included in cash equivalents. |
| Financing Activities | Activities that result in changes in the size and composition of the contributed equity and borrowings of the enterprise. |
| Inflows | Receipts of cash and cash equivalents. |
| Outflows | Disbursements of cash and cash equivalents. |
| Liquidity | The ability of an enterprise to meet its short-term obligations. |
| Solvency | The ability of an enterprise to meet its long-term obligations. |
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Practice questions
- What is the primary purpose of a Cash Flow Statement? Answer: To provide information about the inflows and outflows of cash and cash equivalents from various activities of a company during a specific period.
- Name the three main categories of activities classified in a Cash Flow Statement. Answer: Operating activities, Investing activities, and Financing activities.
- According to which Accounting Standard is the Cash Flow Statement prepared? Answer: Accounting Standard-3 (AS-3).
- What does liquidity refer to in the context of a Cash Flow Statement? Answer: Liquidity refers to the ability of an enterprise to meet its short-term obligations.
Practice MCQs
Q1. Which of the following is NOT a primary objective of a Cash Flow Statement?
Explanation: The Cash Flow Statement focuses on cash movements, not the exact net profit, which is the domain of the Income Statement.
Q2. Which activities involve the acquisition and disposal of long-term assets?
Explanation: Investing activities specifically deal with the purchase and sale of long-term assets and other investments.
Q3. The preparation of a Cash Flow Statement is mandated by which Act and Accounting Standard?
Explanation: The Companies Act, 2013, vide Accounting Standards Rules, 2006, mandates the preparation of Cash Flow Statement as per AS-3.
Q4. Which of the following enhances the comparability of reporting operating performance by different enterprises?
Explanation: By eliminating the effects of different accounting treatments, the Cash Flow Statement makes operating performance more comparable across companies.
Q5. Which type of activity includes changes in the size and composition of equity and borrowings?
Explanation: Financing activities relate to transactions that affect the company's debt and equity structure.
Frequently asked questions
What is a Cash Flow Statement?
A Cash Flow Statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, breaking the analysis down to operating, investing, and financing activities.
Why is the Cash Flow Statement important for users of financial information?
It helps users assess an enterprise's ability to generate cash and cash equivalents, understand its needs for cash utilization, and evaluate its financial structure, liquidity, and solvency.
What are the three main types of activities reported in a Cash Flow Statement?
The three main types are operating activities (related to the primary revenue-generating activities), investing activities (related to the acquisition and disposal of long-term assets), and financing activities (related to changes in equity and borrowings).
Which accounting standard governs the preparation of a Cash Flow Statement in India?
Accounting Standard-3 (AS-3) governs the preparation of a Cash Flow Statement.
What is the difference between cash and cash equivalents?
Cash includes cash on hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash with insignificant risk of changes in value.
How does a Cash Flow Statement help in assessing an enterprise's financial health?
It provides insights into the company's ability to generate cash from its operations, fund its investments, and meet its financing obligations, thereby indicating its liquidity and solvency.
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NCERT Class 12 Accountancy — Accountancy Part-II — Chapter 6 — Cash Flow Statement. Verified by NCERT Help Editorial Team. Reviewed on 29 Jul 2026. Last updated 10 Aug 2026.