Type of Questions
The questions for finding the cash flow from investing activities will usually have the balance sheet data for two years with some additional information as shown below
|Plant and machinery||1000000||850000|
How to Solve
For each Balance Sheet item given in question first check if there is some additional information given.
If no additional information is given
For finding the cash flow – find (Current Year – Previous Year)
For assets if current year > previous year (positive number) then there is cash outflow (as assets are purchased)
For assets if current year < previous year (negative number) then there is cash inflow (as assets are sold)
Note : In case of Goodwill this rule does not apply. If goodwill is reducing, then it means it is amortized and so it does not have any impact on cash flow from investing activities
For liabilities if current year > previous year (positive number) then there is cash inflow (as liabilities are acquired)
For liabilities if current year < previous year (negative number) then there is cash outflow (as liabilities are paid)
If additional information is given
For assets items where additional information is given, enter the information in the following account format to find the hidden information
|To Balance B/d||By Balance C/d|
|To Bank A/c (Purchases)||By Bank A/c (Sales)|
|To Profit on Sale||By Loss on Sale|
|By Depreciation/amortization (for the year)|
Fill the above format with the information given in the question and find the missing information (Usually purchase during the year or sale during the year is found out). These figures of purchase of sales will be entered in the cash flow statement
The above format applies to all the assets including fixed assets where accumulated depreciation method is followed.
If accumulated depreciation method is followed then we have to fill the following formats with the information given in the question.