Microlesson · 5-min read

AS 3 – Cash Flow from Investing and Financing Activities

## Cash Flow from Investing and Financing Activities

### Section B: Investing Activities

Investing activities relate to acquisition and disposal of long-term assets (PPE, investments) and any income flowing from those assets.

Typical inflows (+):

Sale proceeds of PPE (use ledger reconstruction to find actual cash)
Sale proceeds of investments
Interest income received (if classified as investing under AS 3)
Dividend income received

Typical outflows (−):

Purchase of PPE (including renovation/capital expenditure on buildings)
Purchase of investments

> Important: The cash figure for PPE transactions comes from the Plant/Asset Ledger, not directly from P&L. Always reconstruct.

#### Reconstructing the Asset Ledger

```

Plant & Machinery Account

Dr Opening balance ××× | Cr Depreciation ×××

Dr Purchases (CIB) ××× | Cr Sale proceeds (CIB) ×××

| Cr Closing balance ×××

```

Sale proceeds = Carrying value at time of sale ± Profit/Loss on sale

If the ledger has a Profit on sale, the cash received = Book value of asset sold + Profit.

---

### Section C: Financing Activities

Financing activities relate to changes in the size and composition of owners' capital and borrowings.

Typical inflows (+):

Issue of equity / preference shares (actual cash received)
Issue of debentures / bonds

Typical outflows (−):

Repayment of debentures / bonds
Dividend paid (actual cash; reconstruct Dividend Payable ledger)
Interest expense paid (if classified as financing)

#### Reconstructing Share Capital / Debenture Ledger

```

Share Capital Account

Dr Closing balance ××× | Cr Opening balance ×××

| Cr Cash (issue) ×××

```

Cash from issue = Closing balance − Opening balance (if no bonus issue, conversion etc.)

---

### Reconciling Opening and Closing CCE

```

Net Cash from Operating Activities ×××

Net Cash from Investing Activities ××× (usually negative)

Net Cash from Financing Activities ×××

────

Net Change in CCE during the year ×××

+ Opening Cash & Cash Equivalents ×××

────

Closing Cash & Cash Equivalents ×××

```

If net change = NIL, the total of all three sections must be zero.

Worked example

### Example 1

Investing Activities — Illustration 1 (Pages 17–19)

Ledger reconstruction for Plant:

```

Plant Account

Dr Opening bal 7,00,000 | Cr Depreciation 1,40,000

Dr Purchase 4,48,000 | Cr Cash (sale) 49,000

| Cr Machine sold 28,000 (to Machine a/c)

| Cr Closing bal 9,80,000 (bal fig)

```

Machine Account (sub-ledger):

```

Dr Plant (cost) 28,000 | Cr Profit 21,000

| Cr Cash sale (49−28+21=42? — use CIB 49,000)

```

Actual cash from sale of machine = ₹49,000 (read from ledger)

Investing Section:

```

Sale of Plant +49,000

Purchase of Plant −4,48,000

Renovation of Building −2,80,000

Purchase of Investments −1,40,000

─────────

Net Cash from Investing Acts −8,19,000

```

### Example 2

Financing Activities — Illustration 1 (Pages 17–19)

Share Capital ledger:

```

Dr Closing bal 14,00,000 | Cr Opening bal 11,20,000

| Cr Cash issue 2,80,000

```

Debentures: Opening = 0, Closing = 2,80,000 → Cash from issue = ₹2,80,000

Financing Section:

```

Issue of Shares +2,80,000

Issue of Debentures +2,80,000

─────────

Net Cash from Fin. Acts +5,60,000

```

Reconciliation: Operating (2,59,000) + Investing (−8,19,000) + Financing (5,60,000) = NIL → Change in CCE = 0

→ Opening CCE 2,80,000 = Closing CCE 2,80,000 ✓

### Example 3

Investing & Financing — Illustration 2 (Pages 20–21)

Investing Section:

```

Interest Income received +6,000

Sale of Plant +5,000

Purchase of Plant −1,20,000

Purchase of Investments −78,000

Sale of Investments +1,02,000

────────

Net Cash from Investing Acts −85,000

```

Financing Section:

```

Interest Expense paid −23,000

Dividend paid −8,000

Issue of Shares +1,50,000

Bonds repaid −50,000

────────

Net Cash from Fin. Acts +69,000

```

Reconciliation: 47,000 + (−85,000) + 69,000 = +31,000

→ Opening CCE = 15,000; Closing CCE = 15,000 + 31,000 = 46,000 ✓

⚠️ Common exam mistakes

Taking the gross cost of asset purchased from P&L notes instead of the Plant ledger — always reconstruct the asset account to find actual cash paid/received.
Including renovation/capital expenditure on buildings in operating activities — any capital expenditure is an investing outflow regardless of whether it is on an existing asset.
Using the face value of shares/debentures issued without checking for premium or partly-paid shares — use the Share Capital + Securities Premium combined movement.
Netting investing inflows and outflows — AS 3 generally requires gross presentation for investing and financing (except for certain financial institutions).
Forgetting that dividend paid must be reconstructed via the Dividend Payable ledger if the balance has changed between years.

Bare-Act text Para 25 – Gross vs Net Presentation · AS 3 – Cash Flow Statements (ICAI) · click to expand

An enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis.

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