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Cash Flow Statement: Investing Activities (Fixed assets and Investment)

Arjun EP

Published on: April 7, 2021

Preparation of Cash Flow Statement

There are two methods to prepare cash flow statement; they are:

(1) Direct method

(2) Indirect method

Both methods have three activities; they are:

(a) Operating activities

(b) Investing activities

Keep in Mind (KIM)

Only operating activities are difference between direct methods and indirect method.

Investing activities and financing activities are same in both methods.

Investing Activities in Cash Flow Statement

It is based on non-current assets or fixed assets (assets side of balance sheet)

Purchase and sales of non-current assets (fixed assets and long-term assets) are calculated in investing activities.

Any increase in assets mean purchase of assets, it is outflow for the company.

Any decrease in assets mean sales or depreciation of assets.

It is inflow for the company.

If there is depreciation, loss, profit, purchase and sales fixed assets in income statement or profit and loss account, working notes should be prepared.

Plant and machinery

Land and building

Furniture and fitting

Equipment

Investment

Cash flow Statement

Direct Method

CASH FROM INVESTING ACTIVITES		Amount	Amount
	Cash inflow:		xxxx
	Sales of plant and machinery		xxxx
	Sales of land and building		xxxx
	Sales of equipment		xxxx
	Sales of investment		xxxx
	Loan from subsidiary company		xxxx
	Cash outflow:
	Purchase of plant and machinery		(xxx)
	Purchase of land and building		(xxx)
	Purchase of equipment		(xxx)
	Purchase of investment		(xxx)
	Drawings		(xxx)
	Net cash from investing activities (B)		± xxxx

Keep in Mind (KIM)

Sales of plant and machinery mean cash inflow.	Purchase of plant and machinery mean cash outflow.
Sales of land and building mean cash inflow.	Purchase of land and building mean cash outflow.
Sales of furniture mean cash inflow.	Purchase of furniture mean cash outflow.
Sales of investment mean cash inflow.	Purchase of investment means cash outflow.
Never charge depreciation on investment.

Under direct method, no entry for profit or loss of assets.
Under direct method, no entry for depreciation of assets.

Drawings = beginning capital + net income – ending capital
Dividend^s and interest received may be inflow of operative activity
If purchase and sales of particular fixed asset is given, no need to prepare ledger of working note.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2A

The following extracted balances are taken from ABC Company Ltd:

Particulars	1 January	31 December
Plant and machinery	7,50,000	10,50,000
Investment	1,56,000	56,000
Land	10,00,000	8,00,000
Equipment	1,50,000	1,50,000
Furniture	1,10,000	60,000

Required: Net cash from investing activities

[Answer: (50,000)

SOLUTION

Explain,

Plant and machinery has increased; asset increased means purchase of asset; it is cash outflow.

Investment has decreased; asset decreased means sales of asset; it is cash inflow.

Land has decreased; asset decreased means sales of asset; it is cash inflow.

Equipment has equal value in both years; neither inflow nor outflow (no entry)

Furniture has decreased; asset decreased means sales of asset; it is cash inflow.

Cash flow Statement

Direct Method

CASH FROM INVESTING ACTIVITES		Amount	Amount
	Cash inflow:
	Sales of investment		100,000
	Sales of land		200,000
	Sales of furniture		50,000
	Cash outflow:
	Purchase of plant and machinery		(300,000)
Net cash from investing activities (B)			(50,000)

Keep in Mind

There are two options of decrease in asset:

First, decrease in asset may be depreciation; no entry of depreciation in direct method of cash flow statement.

Second, decrease in asset may be sales of asset; it increases cash viz cash inflow.

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2B

The following extracted balances are taken from ABC Company Ltd:

Particulars	1 January	31 December
Plant and machinery	7,50,000	10,50,000
Land and building	10,00,000	8,00,000
Furniture	1,10,000	60,000

Additional information:

(a) Machine value Rs. 70,000 with accumulated depreciation Rs 30,000 was sold for Rs. 50,000.

(b) Land and building sold at a profit Rs 80,000 where depreciation was Rs 50,000

Required: cash from investing activities

[Answer: (Rs 44,000)]

SOLUTION:

Given and working note:

Accumulated Depⁿ	=	Original cost – Book salvage value
30,000	=	70,000 – BSV
BSV	=	70,000 – 30,000
	=	40,000

Profit = Cash salvage value – Book salvage value = 50,000 – 40,000 = 10,000¹

Plant and Machinery Account

Particulars	Amount	Particulars	Amount
To Beginning Balance	7,50,000	By Bank/Sold/CSV	50,000
To Profit and Loss (Profit)	10,000	By Depreciation on sold	30,000
To Bank/Purchase (b/f)	3,70,000	By Profit and Loss	–
		By Ending Balance	10,50,000
	11,30,000		11,30,000

Land and Building Account

Particulars	Amount	Particulars	Amount
To Beginning balance	10,00,000	By Bank/Sold/CSV (b/f)	230,000
To Profit and Loss (Profit)	80,000	By Depreciation (for the year)	50,000
To Bank/Purchase	Nil	By Ending balance	8,00,000
	10,80,000		10,80,000

Furniture Account

Particulars	Amount	Particulars	Amount
To Beginning balance	110,000	By Bank/Sold/CSV (b/f)	46,000
To Bank/Purchase	Nil	By Depreciation (for the year)	Nil
		By Profit and Loss (Loss)	4,000
		By Ending balance	60,000
	110,000		110,000

Now,

Cash flow Statement

Direct Method

CASH FROM INVESTING ACTIVITES		Amount	Amount
	Cash inflow:
	Sales of plant and machinery		50,000
	Sales of land and building		230,000
	Sales of furniture		46,000
	Cash outflow:
	Purchase of plant and machinery		(370,000)
Net cash from investing activities (B)			(44,000)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2C

Following information is available:

Asset	Year 2019	Year 2020
Fixed assets	6,00,000	800,000
Accumulated depreciation	90,000	120,000
8% Investment	1,56,000	56,000

Additional information:

(a) Fixed assets costing of Rs 100,000 with accumulated depreciation Rs 15,000 was sold for Rs 60,000.

(b) Investment was sold for Rs 102,000

Required: (a) Accumulated depreciation account; (b) Fixed assets account; (c) Net cash from investing activities

[Answer: Depn for the year = Rs 45,000; Purchased = Rs 300,000;

NCFIA = (Rs 174,000) ]

SOLUTION

Accumulated Depreciation Account

Particulars	Amount	Particulars	Amount
To Depreciation on sales	15,000	By Opening balance	90,000
To Closing balance	120,000	By Depreciation for the year (b/f)	45,000
	135,000		135,000

Fixed Assets Account

Particulars	Amount	Particulars	Amount
To Beginning Balance	600,000	By Bank/Sold/CSV	60,000
To Profit and Loss (Profit)	Nil	By Depreciation on sold	15,000
To Bank/Purchase (b/f)	300,000	By Profit and Loss	25,000
		By Ending Balance	800,000
	900,000		900,000

Investment Account

Particulars	Amount	Particulars	Amount
To Opening balance	156,000	By Bank/Sold/CSV (b/f)	102,000
To Profit and Loss (Profit)	2,000	By Closing balance	56,000
To Bank/Purchase	Nil
	158,000		158,000

Cash flow Statement

Direct Method

CASH FROM INVESTING ACTIVITES		Amount	Amount
	Cash inflow:
	Sales of fixed assets		60,000
	Sales of investment		102,000
	Cash outflow:
	Purchase of fixed assets		(300,000)
Net cash from investing activities (B)			(174,000)

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PROBLEMS AND ANSWERS

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2A

Following information is available related to plant and machinery:

Opening balance on plant and machinery Rs 600,000

Closing balance of plant and machinery Rs 900,000

Depreciation on plant and machinery Rs 100,000

Required: Plant and machinery account

[Answer: Purchased = Rs 400,000]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2B

Following information is available:

Asset	Year 2019	Year 2020
Vehicle	16,00,000	14,00,000
Accumulated depreciation	2,40,000	3,60,000

Additional information:

A vehicle of Rs 600,000 with accumulated depreciation Rs 320,000 was sold for Rs 200,000.

Required: (a) Accumulated depreciation account; (b) Vehicle account

[Answer: Depreciation for the year = Rs 440,000; Purchased = Rs 400,000]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2C

Following information is available:

Details	Year 2019	Year 2020
Plant and machinery	500,000	600,000
Land and building	200,000	300,000
Investment	150,000	90,000

Additional information:

Depreciation on fixed assets for the year is Rs 90,000 and a part of machinery sold for Rs 65,000.

Investment is sold at profit of Rs 4,000

Required: (a) Fixed assets account; (b) Investment account

[Answer: Fixed assets purchased = Rs 355,000; Investment sold = Rs 64,000]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2D

Following extracted information is given to you:

Assets	Year I	Year II
Machinery	4,50,000	6,00,000
8% Investment	1,50,000	2,50,000
Land	4,00,000	2,50,000
Furniture	80,000	30,000

Additional information:

a. Depreciation charged Rs 30,000 on machinery.

b. Land sold at a profit of Rs 25,000 but furniture sold at a loss of Rs 5,000.

Required: Net cash from investing activities

Answer: (Rs 60,000)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2E

Following extracted information is given to you:

Assets	Year I	Year II
Machinery	5,00,000	6,50,000
Accumulated depreciation on machinery	(50,000)	(70,000)
8% Investment	80,000	60,000
Land and building	2,50,000	4,50,000
Furniture	30,000	15,000